The Value of the Pound
The dramatic fall in the value of the pound is the hot topic in UK economics.
In June 2016, £1 was worth $1.37, but four months later it is worth $1.23. This may just seem like a few pence, but 10% is pretty significant.
It is broadly being called the ‘Brexit effect’, and it stems from the markets’ reduced faith in the UK economy’s growth potential. This change in attitudes leads to currency traders profiting from the fall in Sterling’s value, and the Bank of England is expected to further cut the interest rate.
£1 is worth less in dollars than it used to be?
Whilst there is no such thing as a world currency, the common trading currency is the US Dollar. With so many different economies and cultures involved in the global market, the majority of international transactions are calculated in US Dollars, and conducted in English.
The most significant effect on the British economy would concern the goods or commodities we import. Oil from all over the world is priced in US Dollars, so your local fuel filling station will effectively be paying more in real terms for the petrol and diesel we use in our cars. This leads to higher prices at the pumps.
Other key imports are food, clothing and electricals. The majority of garments are sourced from India and China, whilst electrical devices such as computers and smartphones are made in China and South Korea. Many essential food items we find in supermarkets come from all over Europe and Africa, and crucially, the freshness of the produce means that it can’t be brought in several months in advance. Therefore, the fluctuations in value on the international market can have more instant ramifications.
The other side to this doom and gloom is that our export economy would receive a boost. As £1 is worth more in a foreign currency, British goods work out cheaper for international consumers. Similarly, a tourism boost comes when foreign visitors find that they achieve better value from their purchases.
The net result from a fall in the value of the pound has to be negative though, because of the economic factor that all markets dislike: uncertainty. Whether or not politics really does affect the way people trade goods, an economy with an uncertain outlook tends to put off a significant amount of business.
Whatever happens with soft or hard Brexit, the sooner Britain’s economy stops making headlines the better.