Why the Pound Is Going Down in Value

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Jon Rowe

Jon Rowe

Investment Advisor, Associate with the CISI

October 23rd 2020    7 min read

Ever since the result of the Brexit referendum was announced in 2016, the pound has dropped significantly in value against other major currencies like the US dollar.
 
If you are anything like me, you would have seen a host of friends and family on your social media feed complaining about the decline, highlighting that it was bad news for the UK economy.
 
Unless your friends and family are all qualified economists, it’s hard to tell if it really is such a big deal or not.
 
Over the last 4 years, the pound has never fully recovered from the initial shock of the Brexit referendum and has mostly fluctuated between $1.25 and $1.35. For context, before the referendum, the pound was valued at approximately $1.50 – so you can see that the value has fallen by around 17%.
 
Fears surrounding the value of the pound resurfaced in recent weeks as the UK prepares to leave the EU by the end of the year.

Why has the pound devalued?

The actual reason behind the fall in the value of the pound is pretty simple. The decline is an outcome of the fears and anxiety that relate to the preparedness of the UK to function economically outside of the Eurozone.
 
Many have pointed the finger at the UK government, arguing that not enough has been done to ensure that the UK economy will thrive post-Brexit. Trade deals with Japan and Australia have been highly publicised but many commentators have argued that those trade deals are inadequate.
 
As a consequence of this lack of certainty, currency traders and investors have pulled their money away from the pound and have converted it into other currencies instead, like the US Dollar, Japanese Yen or even the Euro.

What are the consequences for the UK economy?

So at this point, many of you may be wondering how this will affect your life.
 
Well fundamentally, the devaluation has both positive and negative impacts.
 
The most obvious negative impact is that it will become more expensive to buy items from other countries. For example, if you wanted to buy something from the United States for $150, before the referendum you would have had to pay just £100, but now the same item would cost you £116.21.
 
This will obviously affect UK businesses too as some rely heavily on importing supplies from overseas to sell in the UK market. As a result, the chances are that food prices will go up alongside other key consumables like clothes or technology.
 
The other side of this negative is that UK products will become cheaper for businesses in other countries to buy. As a consequence, it may mean that people in other countries buy British products or services more – which will benefit our economy.
 
One sector that is likely to see growth in the post-Brexit era is tourism, as it will become cheaper for people from other countries to come and visit the UK.
 
According to the World Tourism Organisation, 37 million people visited the UK in 2018, contributing £213 billion to the economy. This figure is likely to increase to £265 billion by 2028.
 
Domestic travel in the UK is likely to increase too though as foreign holidays will become more expensive, which means that UK-based travel companies will benefit.
 
Although that might sound great, tourism only makes up around 10% of the UK’s GDP (which currently stands at $2.855 trillion).
 
A major problem for the UK as a consequence of the devaluation of the pound is how attractive it is for foreign workers to come and work here. This is because wages in the UK will become less valuable in other currencies.
 
For example, imagine that you are a doctor in America earning $313,000 per year (on average), would you really be motivated to move to the UK to earn $103,009.82 per year?
 
Of course, $103,009.82 is still a great salary but you can see how drastically different the salaries are. If an American doctor was to move to the UK, he would essentially cut his salary by $210,000… which would be a pretty silly move financially.
 
I appreciate that many of you would argue that the healthcare systems are different and that different salary outcomes are to be expected between the US and the UK, but the fact of the matter is that the UK is becoming less and less attractive to foreign talent. This will not only affect our overall quality of life but it will also affect the quality of our services and products – which has a knock-on effect on our economic prosperity.
 
In the future, the UK could have real problems attracting talent, especially as wages are set to stagnate further. Unless there is a significant growth in wages, the UK will become less and less competitive internationally.
 
This will have a significant impact on other sectors like farming, where farmers have already cited their concerns about not being able to hire enough staff (mostly from Eastern Europe).
 
Workers from Poland, for example, are now finding it less attractive to work in the UK as wages have risen significantly in the country in the last decade. Standards of living have increased in Poland, while property prices remain reasonably low, meaning that owning property is more feasible for the average Pole.
 
It’s obvious that the UK is less attractive when property prices have continued to increase and when wages have stagnated.
 
The reliance on Eastern European human capital was a perk for British farmers and British factory owners, one that is gradually diminishing as the UK prepares to leave the EU.

What can you do to protect your money?

It might seem a little complicated but the best thing that you can do with your money is to hold it in multiple currencies. By doing so, you will minimise the risk that currencies have on the value of your money.
 
One way that this is possible is to use a Transferwise Borderless Account to hold your money in multiple currencies. Transferwise is a British business, located in Central London and so any deposits are protected under the Financial Services Compensation Scheme (FSCS) – which protects up to £85,000 of savings per individual.
 
The best thing to do is to hold your money in the other major currencies (as well as the pound) to protect yourself from currency risks. The major currencies are the US dollar, Euro, Australian dollar, Japanese yen, Canadian dollar and Swiss franc.

Conclusion

In summary, the devaluation of the pound will likely have a mostly negative impact on the quality of life of British people. The cost of living will likely increase, while wages are set to further stagnate.
 
A major issue is that the UK will become less attractive for foreign workers which means that certain sector may become less productive.
 
One positive is that British exports will become cheaper and so foreign businesses are more likely to buy UK products and services. Tourism is also likely to thrive in the post-Brexit era.
 
One thing that you can do to protect yourself from currency risk is to hold your savings in multiple currencies.
Notice: The value of your investments can go down as well as up and you may get back less than you originally invested. This article does not represent personalised investment advice and past performance is not a guide to future performance, some investments need to be held for the long term. If in doubt, contact a local financial advisor for assistance.

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