As the pound plunges to a 31-year low against the dollar, should the UK fear the dramatic fall in sterling?
Joe Rundle, head of trading at ETX Capital, says Yes.
Britain is a net importer with a large current account deficit that needs to be sustained. That’s going to get even more expensive with a weak pound and possible rating downgrade combining to weigh heavily on our nation’s finances. Consumer prices will rise sharply as imports get more expensive. The impact of higher oil prices should be felt at petrol pumps within 10 days or so. There may be a short-term improvement to exports but only because existing deals are still in place. Any improvement from a weaker currency will be more than offset by Europe imposing tariffs on British imports once we leave the EU. Unlike when we fell out of the Exchange Rate Mechanism, there will be no export-led bounce as other countries won’t let us gain any advantage from a weak pound. Moreover, our biggest export is services, which are highly mobile and could easily relocate to other countries. We’re already seeing signs that financial services could be hit as banks are preparing to move their operations overseas.
Jason Hollands, managing director at Tilney Bestinvest, says No.
A sharp fall in sterling had been widely expected after a Leave vote, and this has been exacerbated by political upheavals in the two main parties. We are clearly at a point of maximum uncertainty. There is little line of sight on the UK’s future relationship with the Single Market, or who will lead negotiations. As these become clearer, currency market volatility should settle down from extreme levels. Sterling’s depreciation has both benefits and pitfalls. A weaker pound will hike overseas travel costs and lead to higher prices on imports, but inflation has been far too low and global overcapacity has put downward pressure on prices. Weaker sterling should act as a stimulus to UK exports and ultimately make UK assets look more appealing for non-sterling buyers. Over 70 per cent of FTSE 100 companies’ earnings are generated outside the UK. These firms typically earn revenues in dollars, and translating them back into sterling-reported profits and dividends should help underpin returns.