Written by
Amy Buxton, Financial Trend Guru
, 25 June 2018

With the excitement of the EU referendum all done and dusted, citizens of the UK have been turning their attention to what the ramifications could be, once the country is no longer governed by EU law. Most pertinently, people want to know what they can expect the Sterling exchange rate to look like.

You’d need to have been living underneath a very big stone to have not witnessed the furore that surrounded the EU referendum in 2016, but now that the votes have been cast and the UK has decided to leave, attention is being turned to how the decision is going to affect the British Pound. Naturally, you could say that thought should have been given to the potential impact on exchange rates and the strength of the Pound, before the votes were cast and counted, but hindsight is a wonderful thing, no?

The fact is, we’ve voted, we’re leaving the EU and now, we need to observe and react accordingly to how strong the Pound is against other worldwide currencies and to be frankly honest, it’s something of a rollercoaster, so hold on tight!

How was the Sterling performing before the Brexit vote?

An interesting question and the answer is hard to pin down. Certainly we had seen the Pound in a far stronger position, but having been trading at around $1.50 and €1.30 respectively, things weren’t too precarious.

Let’s not forget that with a fair-to-middling Pound, whilst still firmly in the EU, we were feeling the benefit of a decent return alongside no import tax on the vast majority of overseas purchases, which all contributed to a comfortable exchange rate. The UK has long been bemoaning the rates of import tax and customs charges that goods from America incur, but again, this was tolerable, given that we were seeing a semi-decent return on the Pound. Things changed very quickly, however.

The day before the EU referendum, exchange rates were bearable, but in just 24 hours, they plummeted to an all-time low. Referred to as a ‘currency crash’, the Pound sunk to just $1.28; the lowest level for a whopping 30 years and this brought the potential for serious losses into clear focus. Cue a lot of panic, voting regret and, in the case of David Cameron, shock resignations from the political sphere.

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When was the Pound exchange rate strongest?

The Pound exchange rate has been fluctuating for many years and it’s unlikely that we’ll ever relive the glory days of the 1950s, when a single ‘quid’ was worth a whopping $2.80, but the year 2000 did see a rather pleasing upturn in fortunes, if only temporarily. Giving the public a much-needed dose of optimism as a new millennium unfurled before them, this was, sadly, not to last.

In all honesty, it does no good to look back and lament on periods of fiscal stability, as that won’t change the current situation. A far better idea is to get acquainted with as much information as possible, in a bid to understand how currency fluctuations will impact your own life and business, which is what we’re going to do now.

Why would Brexit weaken the Pound?

There are a number of experts purporting the notion that Brexit actually WON’T weaken the Pound, but it’s a minority opinion. Effects on the Pound are generally categorised as follows:

· The Pound will be weakened because nobody will want to trade with us. Technically, this is very unlikely to be true, as business is business and trade will always continue. In reality, we are more likely to simply be responsible for paying import tax on EU goods, but that isn’t a reflection on the strength of the Pound itself.

· The political instability flagged by Brexit will create a lack of confidence in the Pound. This is a feasible explanation for any impending drops in value of the Pound. If the UK government fails to negotiate viable trade deals with Europe, the population will be quick to make their displeasure known. This, in turn, could lead to a general election, which might lead to trade deals needing to be renegotiated by an alternative leadership party. Hence, the Pound won’t be able to maintain a firm footing. Let’s also not forget that a huge Brexit bill could be looming, which will diminish our credit, as a country.

· The Pound won’t be weakened, as the UK will re-invest in internal manufacturing. This might be a little optimistic, but it’s no bad thing to look on the bright side of life, just ask the guys from Monty Python! If trade deals are up in the air and EU import tax is suddenly a real threat, some experts are predicting that UK manufacturing will get a much-needed jolt of motivation to start diversifying. We’ve never been afraid of a challenge in the UK and in the past, our engineering talents have ben world-renowned, so perhaps we can get back to those glory days and export our goods worldwide, to help the Pound become far stronger. We can but dream!

Why do exchange rate predictions keep fluctuating?

There are few things more frustrating than doom and gloom, without proper explanation, don’t you agree? The issue of post-Brexit exchange rate predictions has become tiresome, mainly because nobody can seem to agree on what we should expect.

For every financial expert that says we should batten down the hatches and settle in for a shockingly weak Pound, there are just as many claiming that things could pick up surprisingly well. The long and short of it is that we just have to wait and see.

Predictions are as reliable as peering into a crystal ball, because we have no way of knowing what lies ahead. Trade deals have yet to be agreed, tax rates are not yet known and, critically, we haven’t left the EU yet! In fact, the process of leaving has actually yet to start in earnest, so unless somebody invents an honest-to-God time machine, we are going to have to wait this out.

What would a weak Pound do to the UK?

The effects of a weak Pound are fascinating, as there are winners AND losers.

UK exporters will be particularly flush, as their products will be considered to be significantly more competitive and therefore, attractive to buyers and the effect on tourism could be incredible. Despite the Brexit vote giving the impression that the UK doesn’t want to interact much with other nations, it could result in a terrific influx of overseas tourists, who’ll find that their Euros etc will stretch a whole lot further. This can be extended a little more to include foreign investors as well, who will be able to snap up what they consider to be value housing and assets.

On the flipside, exporters looking to send their products to the UK could see a fall in uptake, given that everything will cost a whole lot more. Foreign workers might find that the UK is a less attractive option, as long hours will result in less money being sent home, which could see a drop in employment figures. Finally, British holidaymakers travelling abroad could be in for a shock as Stateside and European breaks will naturally cost a whole lot more.

What can be done?

In short, absolutely nothing! As a country, we voted to leave the EU and now, we need to sit back and wait for the government to pull us through the process. We have no option but to have faith that financially beneficial trade deals can be agreed and that the Pound will be able to hold its own in the global currency market.

As a final word to the wise; we know that it’s tempting to look for instant solutions to a falling exchange rate, but be careful with crytocurrencies, which have been heralded as a magic solution. We’ll come to these again, but do your research! If something sounds too good to be true then it generally is and the mystery surrounding this new form of financial investment is just cause to be a little more cautious.

Written by
Amy Financial Trend Guru
, 25 June 2018

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