Official figures from last week revealed that Britain’s economy unexpectedly dropped in April, with GBP/USD dropping to under 1.20 for the first time since the first lockdown in March 2020.
This fuelled fears of a sharp slowdown just three days prior to the Bank of England’s latest interest rate decision.
In this guide, we’re going to be looking at the strength of the Pound post-Brexit and some of the key reasons why we have seen a decline.
Reasons for the Fall in Value of the Pound Post-Brexit
Brexit Uncertainty
Many markets disliked the uncertainty surrounding UK politics, economy and financial sector post-Brexit, meaning many investors were seeking alternative ‘safe havens’ in Europe and the US instead of the UK.
Loss of Single Market
Since Brexit, the UK has left the single market in order to restrict the free movement of people, however, this has discouraged a lot of inward investment.
This means there will be a reduction in long-term demand for sterling.
Trade Friction
As the UK has also left the EU customs union, UK exporters have found themselves faced with significantly increased trading costs, resulting in a lower demand for UK exports and Sterling.
A Decline in Portfolio Investment
The City of London was the dominant European trading centre, attracting lots of capital flows, however, since leaving the European UNion and the single market, trading within the City of London is far less attractive, resulting in a drop in the Pound’s value.
Higher UK Inflation
The UK is experiencing much higher inflation than other countries, making our good less attractive and the competition much more appealing.
What Does the Future Hold for the Pound?
Fortunately, since the Bank of England raised interest rates by 0.25% last week (taking it to the highest rate of inflation in 40 year), the GBP/USD has been pushed back up to above 1.22.
This is the fifth back-to-back increase, taking it to 1.25%. Since December 2021, the rate has increased overall by 1.15%.
Get Expert Help
If you think your business may be affected by the increase in interest rate and decline of the Pound, get in touch with our team at Ryans today to discuss our Corporate Tax Planning services.
With the assistance of our team of expert chartered accountants, you can get a greater understanding of what the changes will mean for you and what steps your business can take to ensure you aren’t affected negatively.