The value of the pound has been highly volatile in recent months, largely because of the uncertainty over Brexit. During recent weeks we have seen it fall again as MPs oppose a no-deal Brexit bid.
The slide in the value of sterling affects everyone – from holidaymakers and those filling up their cars with petrol, to business owners and investors. So who decides its value?
How is currency valued?
When people talk about the pound falling or rising, that means it will buy more or less of a foreign currency because the exchange rate has changed.
The pound is most commonly measured against the US dollar and the Euro and exchange rates are live, meaning they change constantly, because they reflect the frequently changing demand for each country’s currency worldwide.
What affects the exchange rate?
Supply and demand determine the exchange rate of the pound.
If demand for the pound goes up, then its price will go up too. This is affected by lots of different factors, including the strength of the economy, interest rates, the price of goods, the state of the government’s bank balance and the investment activity of speculators.
So, what did happen to the pound?
The pound was trading at just below $1.50 before Britain voted to leave the EU in June 2016.
The value of the pound has fallen since then, and since Boris Johnson took over as prime minister in July its value has fallen to about $1.22, which is where it sits at the time of writing – 10 October 2019.
In early September, as MPs opposed to a no-deal Brexit sought to pass legislation to prevent it, the pound fell to a three-year low against the dollar, just dipping below $1.20. In fact, on 3rd September 2019 it was regularly trading at its lowest level since 1985, except for a brief dip in October 2016 when it fell as low as $1.15.
The pound has followed a similar pattern against the euro and indeed, parity with the Euro no longer looks unlikely.
How does this affect me?
We are naturally most concerned about how exchange rates impact on our own lives and a fall in the pound can have a direct effect on household finances. For example, if the pound is worth less, the cost of imported goods from overseas goes up. This would be particularly noticeable with high ticket purchases, such as a new car. Also, as oil is priced in dollars, a weaker pound may also make filling up your car with petrol more expensive.
A more immediate impact on our personal finances can be felt when we come to swap money for a foreign holiday. A weaker pound means that we get less foreign currency to spend abroad. During periods of exchange rate volatility when currency rates are unpredictable it may be prudent to buy your foreign currency in more than one tranche. Also, give consideration to a specialist credit card, ideally with no extra fee levied for using abroad, where purchases overseas can be made in the local currency using the rate at the time of purchase.
If you would like to discuss your financial planning, please do not hesitate to contact us on 0114 2588899 or email firstname.lastname@example.org to arrange a Free Financial Review. Our Independent Financial Advisers are qualified to provide advice in the areas of retirement planning, tax planning, savings, inheritance tax, investments and protection.
Source: 10.10.2019 Andrew Ball – Independent Financial Adviser (Chartered)