The Uncertainty Principle – Brexit and the Power of the Pound

After a year of political earthquakes, UK-based entrepreneurs are preparing for another twelve months of historic change, with currency exchange rates crucial in determining success.
British retailers who import goods from the EU and beyond are still awaiting the real Brexit Bounce, whereby a powerful Pound will increase their ability to place major orders from abroad.
In October 2016, the Sterling hit its lowest point against the Euro since December 2008, and although it recovered slightly since, the Pound is well below its fighting weight, with a similar story against the US Dollar.

Should I stay or should I go?

Every report on economic confidence has the potential to become a self-fulfilling, market-moving prophecy. Many of these reports, however, have to be taken with a pinch of salt. There are numerous agendas at play, as both Brexiteers and Remainers seek to strengthen their positions. After all, the Book of Brexit hasn’t yet reached its final chapter, with furious debate raging over the merits of a “Hard Brexit,” which would see the UK leave the European Single Market altogether, and a “Soft Brexit,” which would see Britain staying in the EEA.

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It seems that Article 50, the mechanism for the United Kingdom to leave the EU, will be triggered by the end of March, initiating a two-year period of tense negotiations and creating yet more uncertainty for business.
That’s why many on the “Leave” side are now pushing for the repeal of the 1972 European Communities Act, instantly taking the UK out of the EU. This would likely have a sudden and shocking short-term effect on the Pound, pushing it down to an historic low, but in the medium term, it would eliminate the uncertainly over Great Britain’s status, enabling both importers and exporters to make definite plans for an independent future.

A decrease in purchasing power

In an interview on December 20th, Huw Pill, Chief European Economist at Goldman Sachs, outlined his prognosis for 2017.

He foresees slow rates of growth for the UK and EU economies of around 1.5%, but a more relaxed fiscal policy from the European Central Bank, easing the tax burden on the political bloc’s 500 million citizens. He also predicts slightly lower unemployment rates, less deflationary pressure on the EU economy and a rise in the value of the Euro.As for the UK, he expects to see the depressed value of the Pound leading to higher inflation and less disposable income for British families, making them less likely to make the big purchases that are critical for triggering an economic upturn and making it harder for UK businesses to invest in equipment and new hires:
“Higher inflation as a result of the depreciation of Sterling following the Brexit referendum is likely to erode households’ real incomes and possibly constrain consumption,” he explained.nothing is written in stone

What’s next?

If 2016 proved one thing, however, is that the future isn’t yet written. The rise of Eurosceptic parties in France, Italy, the Netherlands and even in Germany, with major elections scheduled for the coming months, could spell the end of the Euro and the entire EU project. If, however, the EU establishment manages to see off the challenge, the single currency is likely to rally as overseas investors latch onto hints of stability. But then there’s the Brexiteer’s Trump card. The new US government is firmly aligned with the Brexit camp and could play a decisive role in how 2017 turns out.

One thing is certain – smart UK importers and retailers will need to wield all the weapons in their arsenal in order to maintain competitiveness in the market. Covercy’s rate guarantee and reduced exchange rates on international bank transfers should give UK SMB’s a necessary tool to make timely decisions in a rapidly changing political landscape.

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