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Pound Volatility Distresses Firms

The volatility of the pound is causing further distress on businesses which are already struggling due to UK’s economic lockdown. Sterling dropped this month to lows not seen in decades against the dollar. Shortly after its lows in forex, the currency rebounded in its best week in 11 years. 

The currency’s wild fluctuations lessen chances of a more stable year after Brexit, creating challenges to businesses in the UK. George Vessey, U.K. currency strategist said, small and medium-sized businesses need currency stability to manage cash flow and finances. 

Vessey said Covid-19 has ruptured financial markets and substantially weakened the currency. With that, it makes planning forward hard for companies who need clear longer-term trends, he said. These companies constantly face these aggressive gyrations in currency rates, he added.

At the start of 2020 most banks were bullish on Sterling after Boris Johnson’s election win. A median forecast projected $1.35 by the end of the year. However as the pandemic’s economic impact widened, the pound dropped below $1.15 to the lowest in 35 years.

Businesses Face Pricey Costs

In the FX market, options betting on the pound’s direction can be very costly. Volatility against both the euro and dollar for the next 12 months has touched the highest since the financial crisis. 

Phil McHugh, Currencies Direct Ltd trader talked about the large conservative majority lower volatility and reduction in hard Brexit headlines. He said, these reduced the urgency to hedge at the start of the year. He added the rocketing volatility makes new hedges trickier to plan for and enter into with prices moving quickly.

First, British supply chains in severely impacted China and Italy, have faced enormous problems. Now, the U.K. government’s travel ban has reduced consumer spending, further besetting their domestic economy with difficulties.

Moreover, getting access to emergency loans which the government promised, has proved difficult. Many are concerned it won’t be enough to save companies from bankruptcies.

McHugh said the fall in the currency coupled with consumer demand putting the brakes on has been a double whammy. It is a double blow for businesses to deal with, especially importers. 

He said crisis has exploded in severity quickly and that consumer demand grinding to a halt makes it difficult. It became difficult for businesses to look ahead and accurately pin down what their future requirements will be, he added.

Meanwhile, in forex news, euro to pound Sterling exchange rate edges higher due to new stimulus policies being introduced globally.

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