How the Falling British Pound can Affect You
The value of the British Pound against the dollar reached a historic low on 26th September 2022. It fell against the euro as well. It follows the report by the British government of substantial tax cuts to be funded by borrowing billions of pounds.
You must also diversify your investments to brace for the recession and fight economic inflation. Therefore, it is advisable to for hedging with options irrespective of what kind of investment you make to safeguard your funds.
This article will discuss why the Pound fell and how it can affect you.
How is a weak pound going to affect you?
Everyone is affected by the Pound's value, from consumers to business owners to investors.
This is because as the value of the pound decreases, the cost of imported items rises.
The dollar heavily influences gas prices.
Petrol - Oil is priced in dollars. Therefore, a weak pound can increase the cost of refueling your vehicle.
The United Kingdom imports 46% of the food it consumes.
Foreign-made mobile phones and automobiles could become more expensive.
Even British-made items can be more costly if their components are imported from outside.
And the value of the Pound affects international travel. If it purchases less of the local currency, prices will increase.
Next year, the dropping value of the Pound might boost the cost of living by 0.5 percentage points. However, a weak pound can benefit enterprises that export to other nations, as their goods become more affordable and attractive to overseas purchasers.
Why did the British Pound fall?
Investors from all over the world purchase and sell vast quantities of foreign money. The objective is to profit by purchasing a currency that appreciates more than the one sold.
The Pound plunged on 23rd September following the government's mini-budget announcement of massive tax cuts. The Pound reached its all-time low versus the dollar on 26th September, when it reached $1.04.
Investors are dumping the Pound because they are worried about the government's objectives. An expert explains that the investors are concerned that some of the announced tax cuts will not be fully funded.
These same worries have also contributed to an increase in government borrowing costs.
The interest rate on 10-year bonds, which governments sell to investors, has increased from just over 1 percent in January to more than 4 percent.
Some investors predict that the government's tax cuts will increase consumer spending, resulting in a price increase. To curb price increases, the Bank would hike interest rates more rapidly and sooner.
Mortgages and loans could become more expensive due to a rate increase, leaving individuals with less cash.
How do other currencies perform?
The dollar has performed strongly against foreign currencies. Only twenty-four have outperformed it since the beginning of the year.
Nonetheless, the Pound has declined versus the dollar by more than 20% this year, placing it among the 20 poorest-performing currencies.
Among the worst-performing currencies are the Argentine peso (-27% decline) and the Turkish lira (-29% decline).
The Euro fell against the dollar by 15% over the same period; for the very first time in over two decades, the two currencies had the same value this year.
During the same period, the Pound has fallen versus the euro. Since the onset of 2022, the Pound has decreased by 13% compared to the Indian rupee.
How will the weak Pound affect visitors to the United Kingdom?
Individuals who are paid in US dollars or currencies that have lately surged against the Pound will have "happy days," as their paychecks will be stretched farther. That means individuals who bought in Australian dollars or Swiss francs, both of which have appreciated against the Pound, could be in line for a trip to see Big Ben.
Tourism contributed over 9% of the British economy in 2019, with approximately 41 million visitors. Moreover, the British government seems to be pursuing it vigorously: It recently declared that it would speak with shops about reintroducing tax-free purchasing for international visitors.
According to statistical evidence and study, consumers book trips based on pricing. Because Britain is less expensive, more tourists would want to visit.
As a result, the depreciation of the Pound may have a significant impact on the British economy and its citizens; nevertheless, for tourists, this may not be such bad news!
Understanding The Value Determination of a Currency
Exchange rates, the valuation at which a currency is purchased and traded, are continuously changing. They are influenced by a variety of factors, including:
Economy: Strong currencies are associated with successful economies since other countries desire to invest there. To do so, they must use the local currency, which drives up its demand and value.
Speculation: The exchange rate is particularly subject to currency speculators, who purchase and sell pounds depending on forecasts of future developments.
Savings: When the Bank of England boosts interest rates, saving or investing in pounds becomes much more appealing, increasing demand for the sterling.
Prices: If British goods are more affordable than those sold elsewhere, they will appeal to international enterprises using the pound to purchase them. This tends to raise the exchange rate.
Public finances: The health of a government's bank balance or the amount of debt it carries can also heavily impact the exchange rate.