Time To Guard Against Sterling's Predicted Wobble

We’ve all digested the manifestos and made a note of the promises to small businesses, but what if we need to be worrying about the 7 May election for reasons other than who gets in? The likelihood is that the upheaval between now and up to a month after the election could impact dramatically on UK businesses.

Small businesses who will make international payments and transfers in the next six weeks may be in for a shock, as the pound could become increasingly volatile as we get closer to the election. Why? We’ve analysed the effects on currency of the 2010 election and the 2014 Scottish Referendum, to explore the impact major political events combined with an uncertain outcome can have on sterling.

"Just this month, sterling fell to a five-year low"

Our analysis suggests this election has even more potential to shake things up for small businesses, which means SMEs across the country should plan ahead to prevent unnecessary costs to their business.

If we look back at the currency markets in the three weeks leading up to the 2010 election (which of course, resulted in a hung parliament) and the three weeks after, there were high levels of volatility. When the 2010 election resulted in a hung parliament, the first in almost 40 years, the pound suffered accordingly.

Our analysis shows that sterling moved over 8% (varying between 1.4334 and 1.5471) against the US dollar within the election period alone and did not regain its pre-election strength until three months after the coalition was formed. For businesses making international payments during that time, a £10,000 transfer into US dollars would have cost them more than £790 extra.

And for businesses making several transactions a month, this would really impact operational costs. Look, too, at last year’s Scottish Referendum where, again, currency was severely impacted.

When the polls signalled that it was possible for a YES vote to come out on top, sterling began to lose ground to the euro. Rates varied over 3% (between 1.2452 and 1.2839) within a short period of time and the euro quickly rebounded after the vote was a NO.

Buy or sell overseas? Time to do something about it

With the election just around the corner and the Conservatives and Labour at loggerheads in the polls, there are expectations of another hung parliament which has every likelihood of creating currency volatility similar to the previous election.

So the pound could fall as the world reacts to the closest general election rsult for more than 20 years. (The last time an election was so tight was in 1992, when Labour led for the majority of the campaign but the Conservatives managed a small majority.)

For businesses, it’s vital to keep a close eye on currency movements so you don’t get stung by an unstable pound. Just this month, sterling fell to a five-year low of $1.4623 from $1.4802 last week, later rising slightly against the euro to €1.3820.

From exports to paying staff in other countries, currency slumps can have a huge effect on the running of an SME.

While a depreciated pound will mean your goods are attractive to international traders, it may leave you with a decision to either increase the price to recover exchange costs or absorb it yourself to avoid overpricing.

You could also find those you trade with overseas could impose sudden policy measures, such as trade quotas, to reverse the trade deficit, which could effectively reduce your sales volumes.

There’s also the issue of ensuring the wages you pay abroad meet local minimum wage standards.

Over the past two years, the pound has been steadily growing in strength again after the recession, and last year, the International Monetary Fund warned the pound was overvalued by as much as 10%.

Whatever the election result, UK business involved in the overseas transfer of money should be prepared for the fears of foreign clients.

On one hand, international markets could be wary of fiscal changes from a new  Labour-led government. On another, there’ll be fears around a referendum on leaving the EU, as promised by David Cameron.

And sterling could suffer further if, as is expected, no party wins a majority on May 7, which will suggest significant political uncertainty globally.

So if you need to make large international money transfers in the next six weeks, make sure you speak to an expert.

You can check latest currency rates by visiting the FAIRFX website.