FX update: The challenges and opportunities of a weak pound

The weakening pound creates winners and losers in international trade, with UK exporters, manufacturers and popular brands looking cheap to overseas buyers, while importers face higher input costs, which adds to the UK’s inflationary cycle.

Despite the pound rising to $1.14 – after falling to $1.03 last week – its highest level for two weeks, after the chancellor pledged to bring forward details of how he would cut debt, its latest falls follow a long decline against the dollar that began in 2015. (Sterling continues its slide, back down today towards $1.10. It’s a very volatile currency market presently.)

The start of this week continued a US dollar decline, with G8 currencies making some advances, after mixed US economic data was released last week. While the dollar looks to be on the back foot, with sterling increasing on the news of the U-turn on the 45p tax cut, any weakness is likely to be temporary as the new UK government try and get traction and the market remains conscious of a deep euro area recession.

Our treasury team monitor exchange rates and protect against volatility by keeping separate accounts denominated in sterling, dollars and euros, which spreads currency risk, while using derivatives to insure against foreign exchange moves.

Most major freight lanes for ocean freight are traded in US$ by shipping lines, so there is a real focus required on the exchange rate, which can indirectly decrease or increase shipping costs. Currently there is an adverse effect for British traders and shippers, which will be high on every Financial Director’s agenda.

Weakening currencies stimulate growth by making exports more competitive, while encouraging consumers and businesses to buy local, but high inflation is exacerbated by increasing the cost of imported products and stimulating domestic growth.

The British pound collapsed dramatically after the new chancellor’s fiscal plans sparked a dramatic loss of confidence in the markets, but it was under tremendous pressure before that, trading near multi-decade lows. 

The Euro has sunk below parity with the dollar under the weight of the EU’s energy crisis and China’s government has been forced to take action to protect the renminbi, with central banks around the world considering interest rate rises, which may drive their economies into recession.

The US dollar is stronger than ever and from the Fed’s perspective a strong dollar helps the fight against domestic inflation. By curbing the competitiveness of US business, it acts to restrain growth, which removes some inflationary pressure. 

Mounting losses in global bond and stock markets and tumbling currencies are largely in line with what Fed officials are trying to engineer: tighter financial conditions that put a lid on inflation. And so far, there are few signs of dramatic market breakdowns, with the world’s central banks not having to tap emergency facilities at the Fed. So far.

The US economy is relatively insulated from many of the shocks impacting the rest of the world, most notably soaring prices for natural gas and electricity, but international turmoil could conceivably alleviate inflationary pressures in the US, which could allow the Fed to pause its relentless interest rate rises and allow currencies to make up ground on the dollar.

We are also closely monitoring and sharing shipping line rates of exchange, which are set based on a variety of criteria by the carriers and are specific to a voyage and vessel. Each carrier uses a slightly different method of calculation. They are not always reflective of the daily GBP/USD position.

Since our inception 40 years ago we have maintained an export orientation, providing outsourcing, supply chain management and global multi-modal transport services to many of the UK’s biggest manufacturers and most respected brand names.

The weakening of the pound means that UK goods are extremely attractive to overseas buyers and we are well positioned to help businesses embrace this opportunity to grow their export markets and take advantage of free trade agreements.

No one is better placed to assist, support and deliver your export logistics aspirations than the experienced Metro ocean team and platform that has already assisted our customers over five decades. Take advantage of our experts for advice and growing your own global markets with slick and fit for purpose supply chains. We can and will deliver advantage to your business in an incredibly volatile and disrupted environment.