The health of the UK economy is paramount to the prosperity of British businesses and, while the current recovery has heralded the beginnings of a business boom in 2014, the climate is fragile and requires nurturing. Following the financial crisis, interest rates remained at a historical low in the UK for over five years. It’s good news for those retailers looking to borrow money, however, it does mean the Bank of England’s (BOE) arsenal for fighting low growth and inflation has been reduced. Further shocks to the system could see increased volatility in currency markets, making it harder for firms looking to do business internationally, as the price of goods will fluctuate based on investor sentiment.
Volatility in the currency markets is often a signal of increased uncertainties. Investors start second-guessing the state of the economy and any changes, or surprises, in the way the economy is going, or how the country is being run, is often enough to send the pound drifting with the winds of investor sentiment. One notable upcoming event carries enough importance and clout to shake things up, and that’s the soon to be held general election, scheduled for May 7 2015.
Open political situation
There are a number of fears surrounding the general election that could see sterling pounded by currency investors as they flee from the British pound. It all depends on which political party wins the election and the subsequent decisions that will be made.
A Labour victory often makes financial markets more jittery as they tend to focus less on pure economic growth and more on economic equality. However, a Conservative win is equally likely to upset currency markets.
UK politics currently has a lot of focus on whether the country should stay in the EU or if it should leave, or more commonly known as BrExit. This becomes increasingly likely with a Conservative government and could severely damage the UK economy and the environment for businesses, because:
- Exporting would become more difficult for UK retailers, which negatively impacts trade as exporting to Europe accounts for over 50 per cent of the UK’s export of goods and services.
- Retailers with an online presence would lose profitability when doing business with Europe, as member states of the EU gain many tariff benefits when trading between each other.
- Online retailers in the UK would need to follow EU rules on products to be able to export the EU, but the UK government would no longer have a say in what those rules and regulations are.
- Scotland would be more likely to rethink independence, leading to further economic and financial uncertainty, which means complications for retailers exporting and importing across the new border.
The current economic climate presents a real challenge for online retailers with import and export needs, with currency markets continually fluctuating on the back of the ever-changing landscape.
Here at Currencies Direct we constantly monitor the situation looking closely at how developments in the polls are impacting on the strength of the pound. Stay informed with biweekly updates on FX ahead of Election in May 2015