Why did the Pound drop again and where will it go next?

If you’ve been watching the news over the last couple of days you will have heard that the UK Pound (GBP) has hit historic lows against the US Dollar (USD) for a second time since the EU referendum.

In this article I take a look at what’s caused this, what this means, where the currency is likely heading next and what it means for you.

What happened?

The pound hit a new post-Brexit low today of 1 GBP to $1.3058 (another 30 year low) it fell to against the Euro to €1.1703, its lowest since 2013, and domestic UK stocks and several property and financial services companies found themselves being sold heavily which resulted in a 2.37% drop in the FTSE 250.

Why did it happen?

Standard Life, M&G and Aviva have all halted investor redemptions on their property funds, growth data for the services sector (the UK’s biggest earner) hit its weakest level since 2013 and the Bank of England issued a major report today that highlighted that several of the predictions it made about the UK voting to Leave in the EU referendum are happening now.

“There is evidence that some risks have begun to crystallise. The current outlook for UK financial stability is challenging.” – Mark Carney, Governor of the Bank of England

The risks that the Bank of England highlighted included the commercial property sector, which has already seen capital inflows (investment) reduce by 50%. The practical effect of this reduction in inward investment is that some projects may not go ahead, several major property deals have already fallen casualty which means new jobs are unlikely to be created in the sector and unlikely to be created by the tenants.

Why does this matter?

Despite the rhetoric from those that were part of the Leave campaign about the UK being the “Worlds 5th largest economy”, we’re now sixth and sliding towards seventh since the vote, what they either ignored or didn’t understand is what holds the UK economy together.

The UK continues to run an annual budget deficit, albeit one that has shrunk over the past few years, this means the UK government doesn’t collect enough taxes and revenue to pay for it’s spending. The UK economy is very reliant on the Financial Services and Services sectors rather than manufacturing for it’s exports and these exports are dependent on having access to the single market, particularly for banking.

This is the reason why so many companies including EasyJet, VodaFone and all of the major financial institutions have begun the process of gaining licenses, informing shareholders and preparing options to move their headquarters abroad.

This move means the tax on their profits will be payable in their new “home” country so even if it doesn’t have an immediate impact on jobs it will have an impact on the tax revenues for the UK government, leading to a choice between lower public spending (cuts), higher taxes or a mix of both.

The weakness in the GBP and volatility in the markets all reflect investors fears that this choice will lead to a new recession and they are pulling their money out of the UK and in particular out of investments in companies that do not have plans to retain access to the single market or are very exposed to the UK market.

GBP-USD-12 hour Exchange Rate July 05 2016.gif

So where is the GBP heading next?

The consensus is that the GBP is likely to, at best, stay at the same kind of level or if not fall further with Credit Suiss lowering their 3-month GBP/USD forecast to 1.22 from 1.58 previously.

This increases the likely hood of further increases in the prices of food, fuel and transport until some certainty returns to the UK economy which with the main political parties still focused on their internal leadership contests.

This isn’t good news but knowing what to expect at least means you shouldn’t panic when it happens. The increase in prices on it’s own is unlikely to be catastrophic the biggest problem is if we all stop spending money just in case, which could cause a far more serious issues.

So go out there, live your life, spend money like you normally do and be prepared for prices increases.

What do you think?

This article is based on my view of the information available and an analysis of the facts and recent events. If you have a different view or think I have it wrong please share your thoughts and let me know, I’m always interested in hearing other points of view and it’s only by working together we’re going to get through the next couple of years.

Sources and Further Reading

I’ve used a variety of sources from financial markets for the figures and sentiment quoted in this article


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