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Election values: sterling exchange rates explained

The value of the pound (sterling) jumped after a period of lower value. What causes these changes and how can UK small businesses take advantage?

The sterling exchange rate was volatile around the election, losing value during the campaigning then rapidly gaining as the likelihood of a Conservative majority increased. The implications can be significant for a small business: the around 4% drop in value from the end of April to the end of the election works out at a loss of around €11,000 on a €200,000 payment.

While currency values are notoriously hard to predict, there reasons for changes are usually straightforward. “It’s all about uncertainty,” says Tom Higham of Foreign Currency Direct. “Markets don’t like uncertainty and the expectation of a period of political limbo following a hung parliament was putting downward pressure on the value of sterling.”

The largely unexpected Tory majority ended the prospects of a coalition government, pushing up the value of sterling by around 2% in the course of a single day. That may not sound like a lot but is actually an unusually large change. The increase in value is due to confidence in Conservative handling of the economy, says Higham. “We’ve seen the economy back on track due to the last government’s decisions. “Their record is not perfect but the market clearly expects those positive steps to continue for the next five years.”

Implications for small businesses

The consequences for businesses are split by business types. Broadly, those importing gain from a strong sterling and those exporting lose out (and vice versa). “The Eurozone is the UK’s biggest trade partner so buying from there more cheaply is very good for many people. But exports of goods and services become more expensive,” Higham adds.

The winners and losers could soon be reversed if uncertainty about the UK’s membership of the EU lingers (as seems likely given the Conservatives’ promise for a referendum). “Again, uncertainty means a downward pressure on sterling value. Leaving the EU would likely put up barriers, which would be bad for business. Being in the EU means strong trade links.”

Higham advises businesses benefiting from strong sterling rates to fix the rates while they are still favourable. “Things can change so fast … Sterling values could increase further if something goes wrong but that is a big gamble. Businesses could find fixing a rate now to be a prudent move.”

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