How can SMEs protect themselves from Brexit, the UK election and pound volatility?

It’s been almost 12 months since the UK voted to break from the European Union, and while the full ramifications of the decision to Brexit are as yet unknown, the dramas of the past year have already had a serious impact on the outlook for the UK economy, SMEs and the pound.

The upcoming UK general election could also change the shape of Brexit dramatically, so what should SMEs be looking out for in the weeks and months ahead?

Plummeting pound impacts import/export prices

Right up until the day of the EU referendum vote, polls were predicting a win for the ‘remain’ camp. There had been some serious ups and downs over the course of the campaign but the likelihood of the UK opting to stay part of the EU remained high.

The pound even gained in light of the projected outcome, with GBP exchange rates broadly firming.
In light of this, saying the result came as something of a shock to financial markets would be an understatement. The UK voted for Brexit, with 51.9% of the electorate voting leave and just 48.1% voting to remain.

Sterling plummeted as soon as the results were announced and extended losses over the days that followed. While GBP/EUR dropped from €1.31 pre-vote to €1.16 by early July, GBP/USD skidded from $1.49 to $1.28 in the same period.

A flash-crash in October left the pound reeling (with GBP/EUR striking a low of €1.10 and GBP/USD hitting $1.20) and the seismic shift in exchange rates had a huge impact on import and export costs for UK businesses.

With the pound suddenly at multi-year lows against the major currencies, the cost of importing goods to the UK increased considerably – eventually leading to price hikes for certain products and services and surging inflation. Conversely, the movement made UK exports more attractive to foreign buyers, with the strength of other currencies against the pound providing better value for money.

Although the pound has seen something of a recovery in recent months and was able to hit comparatively impressive levels after UK PM Theresa May called a snap election in April, political uncertainty in the build up to the June vote has seen the pound unwind slightly.

How the pound performs over the rest of the year hinges on the outcome of the UK’s upcoming trip to the polls.

What do the experts expect from GBP?

For many businesses with foreign exchange/currency exposure (that is, businesses which have to either send or receive international payments) not knowing which way the pound could go next is a serious concern when it comes to managing cash flow and protecting profitability.

How do the experts think GBP will hold up?

Business Insider UK recently collected the following assessments from some of the industry’s leading analysts.

David Morris, Senior Investment Strategist at BNP Paribas:

‘We think that a hard Brexit was already priced into the markets, and for the time being the prospect of a softer Brexit will drive the currency higher, unless the economic data weakens decisively.  That weakness may be appearing, given that first quarter GDP data came in below expectations.  So even if negotiations move in Britain’s favour, the economy might not cooperate.’

Samuel Tombs, Pantheon Macroeconomics:

‘We think that sterling's rally could go into reverse in the short-term, and we still forecast a $1.25 level for sterling at the end of Q2. Further ahead, however, we continue to see scope for sterling to appreciate. The UK public's zeal for Brexit likely will decline, persuading the Government to make as many compromises as required in order to maintain as much access to the single market as possible.’

Danielle Haralambous, Economist Intelligence Unit:

‘The prime minister has committed to taking the UK out of the single market—but a bigger majority would mean that Mrs May would no longer be hostage to Brexiteer backbenchers holding her to account on the terms of the final deal. The pound may reverse some of its recent gains as the economy slows in 2017-18, but to the extent that the general election will deliver greater political stability, we expect to pound to be firmer this year than we previously assumed.’

Protecting your business from pound volatility

While the outcome of the UK general election can’t be predicted at this stage, there are things your business can do to protect itself from pound volatility and exposure to currency risk.

Hedging is a simple means of mitigating the uncertainty attached to international transactions. When paying for goods in foreign currency your costs will fluctuate and margins become unpredictable, compromising your cash flow. But by using currency hedging tools you can lock in a rate, avoid unexpected downward movements and keep costs within budget.

Work with our team of specialists to secure your cash flow against a rapidly moving market. We’ll develop a precision risk management strategy tailored to your business objectives, powered by our tools and analysis.
Please get in touch if you’d like to find out more about our range of risk management solutions.