Foreign exchange dominates the global trade markets and Britain’s recent vote to leave the EU has had a momentous impact on both. Always staunchly independent, Britain has managed to shrug off the immediate fall in the value of the pound and its changing rate against other currencies makes the picture more interesting.
Factors Affecting Forex
Thanks to the rise of global financial platforms such as CMC markets and their handy apps, forex trading is no longer the exclusive domain of knowledgeable stock brokers. Now securely in the hands of every man and woman, forex trading takes place more often from the comfort of the living room sofa than from the inner chambers of Wall Street. For that reason, it really pays to be in the know when currencies fluctuate.
Import and Export
Traders in forex speculate on whether the value of the base currency will increase or decrease against another currency. It is not enough to know that Brexit has affected the value of the pound. The impact on import and export prices as well as political stability has a direct effect on the value of one currency against another. A lower pound makes the export market particularly viable and could be good news for businesses in crisis. For example, Tata Steel may no longer risk closure if potential overseas buyers are able to see better value in their investment due to lower exchange rates.
Moreover, interest rates also have a direct impact on the exchange rate. Higher interest rates appeal to foreign lenders who can see a better return on their investment, consequently pushing the exchange rate up. Similarly, lower interest rates usually lead to a reduction in exchange rates. The Bank of England has kept the base rate low for some time which clearly has a direct influence on the lower exchange rate of the pound. And with plans to keep the interest rate at an all time low or even see further reductions, could we be expecting the pound to decline even further against its rivals?
Countries with low inflation typically see a rise in their currency value as there is an expected increase in purchasing power against countries with a higher inflation. The inflation rate in the UK is expected to be positive, as much as 0.80 percent at the end of this quarter and rising to 1.40 by the end of the year. Will this slow any possible increase in exchange rates?
The Nation’s Current-Account
The amount a country trades with its partners and whether or not it spends more than it earns on foreign trade typically impacts whether or not there is demand home currency. In the first quarter of 2016, the UK recorded a current account deficit of £32.6 billion which was an improvement from the previous £34 billion. The deficit remains much wider than hoped which might continue to drive the exchange rate down. The lower exchange rate is making British goods and services more appealing to foreign markets and might make foreign sources too expensive for Brits to buy. This could lead to an increase in the exchange rate in due time although Britain has traditionally invested more in sourcing foreign materials than investing at home.
Terms of Trade and Political Stability
Given the ongoing uncertainty between Britain’s trading powers with the rest of Europe as the terms of Brexit are explored, there is a lack of confidence in the stability of Britain’s export markets however attractive the low exchange rate. The UK currently exports 40% of its products to EU countries: should Brussels impose an expensive trade levy as a result of Brexit then a significant portion of the export trade might no longer be viable.
Where Next for the Pound?
Coming out of a global recession, Britain is not yet in a comfortable position to be able to ride this storm without bearing the brunt on exchange rates. However, whether the increasing or decreasing influences will prevail remains to be seen.
It is certainly an exciting time for anyone to be involved in Forex Trading. With a little insight, speculating on the pound can be serious business.