Since January, sterling has lost around 5-6% of its value against the dollar and the euro (see figure 1 in charts of the month).
A weaker exchange rate feeds through to businesses via higher import costs, particularly of raw materials. But one of the key findings of our latest global CEO Survey (see Figure 3) was that UK CEOs are the least worried about volatile exchange rates. This may be because most large UK businesses importing raw materials tend to use fixed price contracts or derivatives to hedge their currency risks.
What opportunities does a weaker pound provide to UK businesses? The primary one relates to exports, as UK products become cheaper on the international markets. For export-oriented businesses, this should mean higher revenues. The evidence shows that, on balance, CEOs are more focused on the upside of a cheaper pound than the potential risks it poses to their business.
But market events could lead to further swings in the value of the sterling. So what should businesses watch out for? Developments in the Eurozone should be monitored by businesses in the UK. Any flaring up of the crisis there or unexpectedly bad news (e.g. problems with the Cyprus bailout we covered in February’s Global Economy Watch, or the fallout from recent Italian election results) could lead to a swift inflow of capital into the UK as a safe haven, pushing up the value of the pound against the euro.