Reasons for falling value of Pound Sterling

Why has the Pound Sterling been falling?

Since the start of the year, fears over Brexit caused the Pound to fall. Since the 24 June vote was confirmed, the Pound has fallen even more.

Sterling exchange rate index, which shows the value of Sterling against basket of currencies. Source: B of E

Reasons for the fall in the value of Pound post-Brexit June 2016

  • Uncertainty. Markets dislike the uncertainty over what will happen to UK politics, UK economy and the UK financial sector. The UK is not seen as a ‘safe haven’. Investors for looking for more certainty will prefer to save in US and Europe.
  • Less inward capital investment. Loss of Single Market. The Brexit vote makes it likely the UK will leave the Single Market (to be able to restrict the free movement of people), this will discourage much inward investment (see: levels of inward investment in UK). With less inward investment, there will be less long-term demand for sterling.
  • A predicted decline in portfolio investment. The City of London has been the dominant European trading centre, attracting many capital flows. Outside the EU and the single market, this is likely to make trading in the City of London less attractive. If there is a smaller flow of saving into the UK, then the Pound will fall in value.
  • Current account deficit. In 2016, the UK has a high current account deficit as a % of GDP. This current account deficit has been financed by capital flows, but if these dry up, the Pound will have to fall to correct the imbalance in trade.
  • See also: How much will Pound Sterling fall?

General reasons for a decline in the value of Pound Sterling could include:

  • If Recession is forecast in UK. A recession means interest rates will stay low and more possible monetary easing. Lower interest rates make the UK a less attractive place to invest hot money flows (get a better return elsewhere)
  • House price fall. A significant fall in house prices increase the likelihood of persistently low interest rates.
  • Balance of Payments. A current account deficit (value of exports less than imports) leads to an outflow of foreign currency, putting downward pressure on sterling. This is important since drying up of capital flows due to lower interest rates and global credit crunch
  • Strength of the Euro / dollar. If the Euro or Dollar becomes very strong, e.g. because of good economic news, the Pound will fall relative to these currencies.
  • Quantitative Easing. The Bank of England’s policy to create money electronically, increases the monetary base. This increases the risk of future inflation in UK and so tends to reduce the value of the Pound.
  • Long term purchasing power parity. If UK goods become relatively more expensive compared to other goods, then there will be a gradual decline in demand for UK exports, putting downward pressure on the Pound.

Euro or Euros – What is the plural of Euros?

A falling pound impacts on our exporters, the price of importers and future rate of economic growth. But, the most interesting thing about this post seems to be whether the plural of Euro is Euro or Euros.

I’m going for euros. Because I Just like using it. But, it is also what the EU recommend for non-legal documents.

Video on the Economic Effects of Fall in Value of Sterling (2009)


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