Sterling hits 37-year low

If foreign investors lose confidence in the country, its government and economy, which is happening at scale, Sterling could fall much further. This will keep inflation higher and growth lower. So far Sterling has primarily fallen against the Dollar this year and this is because the greenback has been strong against all currencies. Unfortunately, as oil prices and other commodities are priced in dollars, this keeps inflation high for us. However, Sterling has also fallen against the Euro this year, making our imports from Europe more expensive. All this is despite the UK having higher interest rates than Europe as higher rates attract savings and inflows into the currency. The UK has a trade deficit with the rest of the world, meaning it imports much more than it exports. It needs to attract capital to fund this gap.

The biggest problem with a weak Pound is the cost of imports, especially oil and energy imports. Most global trade in oil, gas and electricity is done in Dollars, so the falling Pound is going to make energy even more expensive than it already is. This is obviously the last thing we need and bad news for businesses. Unfortunately, the fact that weak Sterling makes our exports cheaper is massively overshadowed by the current energy crisis and the fact we run a trade deficit.

The reverse shrink ray gun. That is the effect a devalued Sterling has on the cost of imports and energy. We have seen Sterling fall by over 20% against the US Dollar since May 2021. That means that anything priced in Dollars costs us 20% more to buy now than in May last year. That acts as a multiplier to the rising energy costs due to the energy crisis and means that we are paying substantially more than the US for these rises. With the Government looking to increase the National Debt we could see two impacts from the fall in Sterling: The best case scenario is that investors see that UK debt (Gilts) are cheap due to exchange rates and hence buy them. The worst case is that investors become worried that Sterling's slide is more permanent in nature and hence look to avoid buying debt (Gilts) or even start to sell. If we can't get buyers for new Gilt issues then we will be forced to increase the Yields (interest payments), effectively making it a lot more expensive for the country to borrow. UK pension schemes are heavily invested in Gilts so this scenario could herald some serious problems for pension schemes and members.

There are many factors that influence the sterling’s nosedive. Investors continue to be uncertain about the global economy, so they take safer bets by putting their money in the greenback. Together with the Fed’s hawkish stance for US interest rates and the BOE’s recent interest hike, this has pushed the dollar higher and plunged the pound to a record low. But it’s not only the sterling that’s being pressured by a stronger dollar since even Asian currencies are losing ground as well. What this means is that on the consumer side, imports will be more expensive so expect the prices of raw materials such as wheat and crude oil to be higher. Essential goods will always be on consumers’ shopping list and since these are non-discretionary purchases, it will push inflation higher unless the government and BOE’s interventions work to tame the rate of price increase. On the other hand, enterprises that sell goods in overseas markets can benefit. Even the local real estate market can be attractive for foreign investors too.