Pound on the slide over Brexit Fears

Paternoster Square, the financial heart of London.Image: gren

Paternoster Square, the financial heart of London.Image: gren

The British sterling has hit a seven-year low against the U.S. dollar which currently stands at $1.4057 as Boris Johnson gave his backing to exit the EU. The credit rating agency Moody’s are cautioning that this could have an overreaching effect upon the UK. As a result, the UK’s credit score which currently stands at Aa1—which is one below the top rating triple A score—may be downgraded should the UK opt to exit the EU. This would result in the UK government having to pay more to borrow.

Investors have played a significant role in leading to the pound’s decline as they worry about the impact that a potential exit from the EU will have on the UK’s economic prospects. The referendum’s effect may be seen before a vote is even cast as businesses do not like uncertainty. This could hamper potential investments by large corporations and the overall growth of the  UK economy.

As a result of the deteriorating pound, consumers will find themselves paying more for holidays abroad as they will receive fewer dollars and euros for the pound. The cost of importing goods from abroad will also see an increase. Unfortunately for consumers, should the pound continue to fall, the costs of goods will begin to rise in order to reflect this.

Businesses, however, will experience both the positive and negative effects as a result of a weaker pound. Those who export goods overseas will reap the benefits as they may witness economic growth in their sector. This is because a weaker pound helps them to compete in markets where the strength of the pound has, up until now, hindered their growth and rendered them unable to compete. On the other end of the spectrum, a weaker pound may mean that businesses who rely upon importing goods will suffer financially due to the increased prices.

Unfortunately, it seems unlikely that the decline of the pound will slow down anytime in the near future, as markets and businesses remain on edge about a potential exit and are gearing up for the inevitable sharp drop in the pound.

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