How does the foreign exchange impact UK businesses?

Written by Nigel Simpkins

The British pound has been under scrutiny for some time now, with the GBP/EUR currency pairing having plunged significantly over the course of the last two days. This is fairly typical for the GBP, which has continued to trade in an ever-depreciating range since the Brexit vote back in 2016.

For many, this is little more than an interesting aside, but the fact remains that fluctuating foreign exchange rates and currency prices can have a significant impact on both business-owners and the economy as a whole.

We’ll explore the relationship between currency prices and the business community below, while asking whether or not a weak or a strong currency is preferable?

Payments and Merchandise Trade – Impacting Business on a Daily Basis

In many cases, the impact of currency fluctuations is easy to overlook, primarily as most business transactions are conducted in their domestic currency.

However, for firms that trade or operate internationally, real-time currency rates directly impact criteria such as supplier payments and merchandise trade.

In the case of merchandise trade (which refers to a nation’s imports and exports), for example, a strong domestic currency will actively stifle exports while simultaneously making it cheaper to import goods and materials.

Conversely, a weaker currency can create more competitive international prices and stimulate the demand for exports, and over time this will minimise a nation’s trade deficit and increase its surplus over time.

Whether this is favourable or not depends on the nature of your business, while those that deal specifically in import and export trade will focus primarily on the latter when the domestic currency is declining in value.

Currency rates also impact on international supplier benefits, and this can either benefit or hinder businesses. For example, a weakening British pound will increase the value of international supplier labour from the perspective of UK firms, whereas overseas contractors will be required to accept an effective pay-cut when the GBP rises in value.

What About the Impact on the Economy?

If you’re familiar with forex trading and deal regularly in international currency pairings, you’ll also be aware that shifting values are directly linked to a country’s interest rates.

This has been borne out during the recent coronavirus pandemic, with a number of businesses (including the UK) having slashed their base interest rate as part of comprehensive quantitative easing measures. While this helps to support failing economies, however, it also weakens domestic currency growth and minimises capital inflows from overseas.

Largely driven by foreign direct investment (FDI), a reduction in capital inflows that impact negatively on GDP and cause economic sentiment to decline, and this can have a further effect of everything from share prices to the prevailing levels of consumer confidence.

This type of impact is often overlooked by businesses, particularly export-led ventures that profit directly from increased exports when the domestic currency declines.

However, it’s crucial that business-owners and entrepreneurs continue to track domestic currency values over time, and look to make more informed decisions as a result.