UK General Election 2017: The Impact Of The Pound For Small Businesses

Less than two weeks before UK voters go to the polls, Jonathan Watson examines how the general election will affect the pound's value

UK General Election 2017: The Impact Of The Pound For Small Businesses

Volatility in the currency markets is a regular feature during and after a UK general election and unexpected volatility on the pound can cause headaches for small businesses. We can never guarantee the future performance of a currency and businesses need to be aware of the potential pitfalls that unexpected movements will have on their business, plus, what they can do to minimise these risks.

What can we now expect on the currency markets as we learn more about the new government, and what can businesses do to mitigate the uncertainty, avoid any nasty surprises and keep plans on track?

Elections are always important events for exchange rates

Political uncertainty is one of the key drivers of the foreign exchange market with uncertainty usually translating into weakness for sterling. Once the result is known we might expect a spike in the value of sterling, this must however be measured against the expectation.

Expectation is a critical factor in the currency market since rates usually move ahead of the events as investors begin to ‘price in’ the predicted outcome. The expectation has been for a strong Conservative victory, leading to a rise of sterling. However just lately the pound has dropped as the previous Conservative lead estimated at 20 points was reported to have dropped to just nine points.

Whilst we must take the polls with a pinch of salt seeing as they have been so disastrously wrong in the last few years, this is what the market looks to for guidance. Betting markets have now become more popular indicators but these paint a similar picture, the general expectation is a strong Conservative and Theresa May win.

Small businesses needs to be prepared for any shocks

Volatility on exchange rates has a number of effects on small businesses, namely changes in costs. The main point for any business is of course to turn a profit and the changes in costs resulting from big shifts in exchange rates can be a key factor in determining this.

Small businesses are by nature less diversified and less able than larger firms to weather big changes in economic conditions. They therefore need to be more aware of the risks posed by the general election and its impact on the pound.

Exchange rate fluctuations can affect a business directly through the goods or services they import or sell overseas. Or it might affect them via a supplier or distributor they are dealing with.

Communication and preparation are key to managing the volatility so whilst unfortunately there is nothing that can be done to alter the rate itself there are measures that can be taken to limit the negative consequences of a fluctuating rate.

One popular option is a ‘forward contract’ where a business can fix today’s rate for settlement in the future, thereby guaranteeing a certain price for a fixed period. Further tools that can be utilised include exchange rate clauses in quotes and arrangements where the buyer or seller reserve the rate to renegotiate the price should rates move more than a certain amount within a specific time frame between quote and order.

Of course there are two sides to every story, businesses selling their product overseas will find they are suddenly making more profit from the improved exchange rate. But they too should be preparing for sudden shifts and how it might impact their bottom line.

Hope for the best, plan for the worst

Even if Theresa May does perform well, there will then be lots of fresh questions over the outcome for Brexit. It won’t quickly solve any of the issues surrounding Brexit and the economy, and these are all points the market will focus on once the dust settles after June 8.

Being caught on the wrong side of a sudden currency movement could cost a business thousands and potentially put a small business or start up out of action. Business needs to be prepared for a period of volatility on exchange rates as the market digests the outcome of the election. Exchange rate clauses, forward contracts and open conversations with suppliers are vital to managing the risk and maximising the opportunity.

Jonathan Watson is chief market analyst at Foreign Currency Direct.


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