The GBP/USD (sterling/dollar) a.k.a. The Cable, is one of the most traded forex pairs in the world. It is considered one of the major pairs. The current rate of is around 1.25 – 1.28 on any given day, indicating that £1 is the equivalent of $1.25 – $1.28 on average.
If sterling appreciates, it means that holders of sterling can purchase more per unit foreign currency. This is reflected by an increase in the exchange rate. There are many reasons why currencies appreciate, notably improved sentiment, interest rate hikes, excess demand, and loss of confidence in competing currencies.
Currencies can also lose favour in the financial markets. For example, loss of confidence in the GBP can occur if Brexit-related concerns weigh heavily on the GBP.
In such a scenario, people will likely sell GBP, driving down its value relative to other currencies like the USD, EUR, JPY, CAD, NZD. Changes in cross-rates are important for many reasons. For starters, the purchasing power of your money will be affected by these price movements.
As a case in point, an individual wanting to transfer £100,000 from the UK to the USA will realise an approximate dollar value of $125,000 - $128,000 (based on the above exchange rates).
However, if the GBP depreciates sharply, the dollar value of that £100,000 could be eroded further. Assume that the exchange rate drops to the following range $1.18 - $1.23. This means that the USD value of £100,000 will now be worth $118,000 - $123,000.
What is the impact of Brexit on the GBP?
It is clear that Brexit is a major geopolitical event which has had dramatic consequences for the UK and to a lesser degree the EU. For example, Prime Minister David Cameron promptly resigned and was replaced Theresa May.
Her inability to secure support for a Brexit plan resulted in her announcement that she would be retiring as PM of the United Kingdom.
Such is the highly contentious nature of Brexit that it is having a real and lasting impact on political, economic, and social elements of the UK economy. Consider the following:
· The UKs divorce agreement with the EU is unprecedented and there are no signposts or frameworks in place to facilitate this type of transition.
The Grexit (Greek Exit) from the EU was scuttled as the IMF, and the European Parliament. Major European nations like Germany and France worked feverishly to prevent Greece from exiting the EU.
Grexit never came to pass, but the UK is moving forward with its Brexit. This inherently brings tremendous volatility to the scene.
· Many goods from the EU to the UK have become incredibly expensive.
This is a result of a weakening GBP which makes imports into the UK expensive. By the same token, exports from the UK are much cheaper in EUR terms. This helps to develop an export-driven economy.
· UK expatriates on a pension in European countries have watched the purchasing power of their GBP pensions decline as the EUR strengthens relative to the GBP.
This is evident in the exchange rate paid per unit GBP in foreign currency. Consider a hypothetical example of €1.35 for every £1 in 2015 versus €1.13 for every £1 in 2019. £1000 would be worth €1350 four years ago versus €1130 today.
Clearly people relying on the GBP for their well-being are struggling to keep pace with inflationary pressures and the buying power of sterling.
· Banks don’t offer the best rates on international money transfer.
Nowadays, customers are getting better deals with non-bank entities in the FinTech sector. With Brexit concerns mounting, it is clear that a weaker GBP will not bode well for UK expats. The purchasing power of their currency is degraded and they may be inclined to pack up and return home.
Money transfer companies would be doing less business. In the interim, while the Brexit hoopla continues, it’s clear that individuals and businesses will be using no fee money transfers with increasing alacrity to rearrange their financial portfolios for maximum benefit.
If people are fearful that the GBP will depreciate further, they will be more inclined to purchase EUR, USD, SEK as stores of value.
The GBP has fallen precipitously against the USD since 2008. Consider that £1 was trading at $2.02, 11 years ago and is now trading at a smidgen over $1.20. This has eroded the GBP/USD performance significantly and it looks like further declines are likely to take place.
From a US perspective, it is much cheaper to buy UK-produced goods and services because the pound is weaker. From a UK perspective, all imports from the US are relatively more expensive because more GBP has to be paid per unit USD then before.
This is only going to intensify as the Brexit saga continues.