What’s been going on with the British pound lately?
The British pound is the world’s oldest currency still in use. In fact it’s been around for well over 1000 years! And with the new plastic £5 notes and a new £1 coin on the way, it’s been making the headlines a lot recently. But some of the news hasn’t been so great. You may have heard that the pound has been ‘falling’ in value. So what’s this all about?
What’s been going on?
Before the Brexit vote lots of people said that the economic insecurity caused by leaving the European Union would be bad for the pound. To some extent they’ve been proved right. Before the vote one pound was worth around $1.49, but now it’s worth around $1.22, the lowest it’s been in 31 years. Others just think this is the currency ‘settling down’.
How is this value determined?
Currencies get traded on what’s called the foreign exchange market. It’s the biggest market in the world. This is where people buy and sell different countries’ currencies, which are usually valued in comparison to how many US dollars they are worth. What happens in this market affects the and the value of the notes in your pocket. And since Brexit, the pound has fallen by around 18%.
So why’s the pound lost so much of its value?
Several reasons. Perhaps the main one is that the people making those currency trades believe that the UK economy will do worse in the coming months and years than economies in other countries. People have been selling their pounds and buying dollars instead, which looks to be a much stronger currency going forward.
Following this initial slide downwards some other people have been making trades on the fact that the value of the pound is falling. These are a bit like bets. If the pound does fall, they make money. This can contribute to the currency being undermined even further.
And when the market starts to lose faith in a currency this can make things even worse, like a kind of self-fulfilling prophecy. People lose confidence so the value falls. This leads to even less confidence, so the value falls even more. It's a vicious circle. This is what’s happened in the last few days. It’s been called a ‘flash crash’. The same thing happens in much bigger financial crashes too.
What does this mean?
One of the main impacts is felt by those travelling abroad. They’ll get less of the currency of whichever country they’re visiting, making holidays much more expensive.
It also affects the cost of the things the UK imports into the country, making buying goods from abroad more expensive, which then filters through to the prices people pay on the High Street.
This can lead to an increase in , which can make the cost of living more expensive, and if this rise becomes greater than the rate at which incomes increase, it means everyone becomes poorer.
One silver lining is that for businesses selling their goods abroad, the low pound makes those goods cheaper for foreign buyers, so this can actually mean more stuff gets bought and more revenue gets made. It’s also pretty nice for people visiting the UK as they’ll get more pounds for their own currency.
So overall, it’s good if you’re a business owner selling internationally, but perhaps not so great if you’re looking to escape the gloomy British winter. Also, not so great for Brits thinking about their Christmas shopping. Ho, ho, no.
