What’s happening with GBP?
The question on everyone’s minds heading into the second half of 2017.
This part of the year is a critical time for sellers as they prepare for the high-value holiday sales season.
Of all the risks ahead of the UK, political risk sits at the forefront. Inherently unpredictable and perilously complicated, managing the moveable feast of the political landscape is near-impossible. Then, add Brexit.
The referendum to leave the European Union threw Britain into chaos. David Cameron resigned as Prime Minister, and Theresa May took the helm.
How messy is it?
The short answer – very.
The referendum itself showed deep divisions. The ‘Leave’ campaign won over 17 million votes, but nipping at its heels was the ‘Remain’ camp with over 16 million votes. Both won more ballots than any other political party to have run in any general election in the history of the UK.
David Cameron immediately resigned as Prime Minister, and fellow Conservative Theresa May took his place. May not only inherited the responsibility of guiding Britain through a messy divorce with Europe, but a slew of internal dynamics to deal with.
Infighting ensued immediately after the referendum vote. Scotland threatened to split with the UK entirely as the vast majority of Scots voted to remain in the EU.
Theresa May called for a general election to calm things on the domestic front. While the election did take away 21 seats in Parliament from the Scottish First Minister’s SNP party, it backfired on the Conservative’s own standing in Parliament. Instead of turning a small majority into a more sizeable foothold, Conservatives lost their majority altogether, forcing them to form a minority government with Northern Ireland’s Democratic Unionist Party (DUP).
The DUP’s support on key votes gives May and her Conservatives the ability to pass legislation. However, to govern she will not only need these votes, but blanket support from her own party. With the weight and complexity as Brexit at home and abroad, this is far from assured.
How much will political risk weigh on GBP?
The impact of the vote to leave the European Union was immediately felt in the world of currencies. Sterling went into freefall, dropping over ten percentage points in 24 hours to hit more than a 30-year low against the US dollar.
While the domestic picture becomes more and more opaque, sterling remains remarkably resilient.
The pound to dollar exchange rate – commonly referred to as ‘cable’ – jumped more than 2% when May called the snap elections. Yet even as the election yielded the opposite of the intended result, cable is still trading higher at the end of June vs. before the election was called.
The value of a nation’s currency is often viewed as a gauge of how investors see the economy. We could then argue that this points to a more positive outlook for the currency, but the fundamentals tell a different story.
Signs of a slowdown are appearing as inflation creates concerns on the domestic front. A weaker pound has pushed inflation higher. While this makes British exports more attractive, it is having a negative effect on growth and wages. As real wages fall, consumers have less purchasing power. They are less likely to go out and spend, which in turn hurts economic growth.
The pressure on UK consumers tied to a messy political outlook create some significant concerns as they begin Brexit negotiations. While a stable pound seems to be the pattern right now, we caution that the myriad uncertainties ahead could introduce unexpected risks against the pound.
As we head into the holiday season, your incoming disbursements will likely start to pick up. For many of our clients this is the peak selling season.
Leaving your business open to the risks of an ever-changing currency market can have a negative impact on your bottom line. To see how these swings could affect your business, learn more about forward contracts for eCommerce sellers.
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