The British Pound is at great risk of going down against other currencies as the United Kingdom and Europe continue to face severe economic problems. The European Union is facing a deep recession and many nations are feeling the pinch as they try to balance their books. This means that the demand for safe-haven assets such as the British Pound is high. These high levels of demand have resulted in over printing of the British Pound due to the increased supply of money in the economy, and this has significantly increased its rate of exchange. In addition to this the Sterling Pound’s recent increase in value against the Euro has also resulted in it being more difficult to trade with the European Union.
These factors mean that the British Pound is at greater risk of being brought down against most major currencies. The Swiss Government recently announced that their currency would be Swiss Francs rather than the Euro. Other countries that may follow suit are Australia and New Zealand. All these moves by other nations would reduce the effectiveness of the British Pound and send its value weaker against all other major currencies. These reduced values will mean that British businesses will have to absorb these losses in order to continue trading on the UK market.
There are a number of reasons why the British Pound may be in greater danger of losing value. One of the biggest contributors to the risk is the ongoing weakness in the United Kingdom’s economic performance. The global credit crunch that has resulted in massive worldwide financial problems has had a significant negative impact on the UK economy. The lower economic figures have meant that the British Bank Credit rating has fallen over the course of the past year. This has had a significant adverse effect on the financial positions of banks and lenders, which have consequently increased the level of risk that they take on in the UK market. As the risk of default increases on loans and mortgage deals, the weaker pound has actually contributed to higher inflation in the UK, because the cost of imported goods has also risen.
Another important factor contributing to the pound’s potential fall as a result of the global recession is the rising uncertainty that surrounds the UK economy. Uncertainty in world markets means that risk management must be a priority for businesses. Uncertainty can also lead to less confidence in financial markets, leading to a further decline in the attractiveness of the British Pound. The continued weakness of the global economy has led to less demand for risk products such as equities and derivatives, which act as a financial cushion for investment decisions.
In addition, a lower appetite for risk may mean that companies are reluctant to invest in large chunks of their capital in assets or operations unless it can be guaranteed that future returns will be profitable. In the past, large multinational corporations always made sure that they had enough funds set aside for unexpected risks. However, this comfort and assurance of returns are no longer possible in the UK economy, as the current recession has seen companies cut back on their spending and some have even gone into receivership. This has made it more difficult for large companies to raise substantial amounts of capital, which have usually been used as a form of insurance against eventuality.
When combined with a weaker banking industry, the combination of these factors points to a weaker UK economy and increased risk to its currency. As the economy rebounds, the Bank of England will need to keep rates high to support the economy and financial markets. This has resulted in doubts over the effectiveness of quantitative easing, with some economists predicting that it will only strengthen the economy by pumping billions of pounds into the economy.
A weaker pound would encourage companies and individuals to shift their investments away from the UK in order to retain their current positions. Sterling’s fall could also affect UK exporters, who import their raw materials in dollars and sell them in sterling. If they were to start shipping their goods in other currencies, then the demand for the products would reduce. Sterling’s fall could also depreciate the value of the British Pound. It is unclear whether this will have a major effect on investment in the economy, but any effects that are produced could last well into the future.
Sterling’s recent fall could also have a negative effect on the international investment markets. If the United Kingdom’s currency lost value significantly, then foreign investors would lose confidence in British securities and invest elsewhere. If this were to happen, then the UK economy would suffer, leading to higher inflation and lower economic growth. Sterling’s recent downfall could dampen the appetite of some UK companies to raise their funding. The uncertainty that surrounds the future of the British Pound could dampen economic growth in the U