Liz Truss has had a remarkably tumultuous start to her tenure as prime minister. Just a few days into taking office, the country lost its longest reigning monarch Queen Elizabeth II which certainly rocked morale as the entire United Kingdom grieved. The timing of this seemed quite poetic, marking the end of an era for Britain and a reminder that change is a constant.
Following this, Truss and her government set out to handle the difficult economic decisions that must be made as we struggle against rising inflation and suppressed consumer confidence. In a very controversial manner, it was announced that the government would cut taxes quite significantly, in an attempt to stimulate the economy. This would be funded by borrowing billions of pounds at a time when the cost of financing is significant.
That’s where the chaos started.
The weakest pound we’ve ever seen
In response to the news, and exaggerated by weak economic forecasts, the British pound fell to its lowest level against the dollar in history – reaching an exchange rate of $1.04, almost reaching price parity. This was a scary situation and caused a lot of speculation about the future of the economy. The government has since then walked back on some of the proposed tax cuts but it seems that the damage has already been done.
For the UK, this is likely to cause an increase in interest rates which will have a dramatic effect on mortgages, borrowing, and prices across the economy. And for businesses that operate in the region, a weaker currency makes it more difficult to compete in the global marketplace.
How could the weakening pound impact your company?
Currency risk is incredibly pertinent in the modern era and is something that should always be a key component in your risk evaluations as a company. Here are some of the potential implications for your company if you utilize the British pound in your organization:
- Increased cost of borrowing. If you’re leveraged in any pound-denominated debt you’ll feel the impact of rising interest rates in your repayments. Increasing debt service costs has a direct effect on profitability and places more pressure on your balance sheet at a time when things are already strained.
- Reduced consumer confidence. A weaker pound also has a psychological effect on the purchasing behavior of British customers – who now seek to tighten their belts and reduce their spending. As such, you’ll likely see a drop in sales from Britain which can be damaging if you’re reliant on that market to hit your targets.
- Increased cost of UK imports. If you’re importing goods from the rest of the world into the UK, those prices have now gone up in real terms. If you aren’t able to pass that on to consumers then it will chip away at your margins. And even if you are able to pass it on, it adds to the inflationary pressure that is already mounting.
- Decreased cost of UK exports. On the other side of the coin, if you’re purchasing goods or services from the UK, things just got cheaper for you. This can be an important boost in these challenging times – especially if you rely on these materials for your own purposes.
This list certainly isn’t exhaustive but it gives a good sense of the key implications that might affect you if you have British connections in your company. Importantly, you’ll want to try and identify the specific things that move the needle for your company and prepare for them as best you can. Using an FP&A tool like the ones that we build here at Apliqo allows you to analyze and visualize the impact of such a currency shift for your unique situation.
By changing the key drivers within your operating model, you can then see how that flows through into every other aspect of your business. You’ll never be caught out by foreign exchange fluctuations again. If this sounds good, get in touch today, and let us show you how we can help.
