The British Pound (GBP), like any other currency, is prone to fluctuations that can impact business and the final cost of goods and services. In the UK, the Bank of England is tasked with maintaining the value of the pound to ensure conducive business conditions. Stable exchange rates allow businesses to stay competitive, while fluctuations may present challenges.
Why Do Currencies Fluctuate?
Currency fluctuations are a natural part of the global financial system, primarily driven by changes in supply and demand. When a currency is in high demand, its value typically rises relative to other currencies. Conversely, when demand decreases, such as during a domestic economic downturn, its value declines.
Other factors, such as geopolitical events and economic policies, also influence exchange rates. These factors are always in play, so price fluctuations occur daily depending on current events. For instance, the release of employment reports and regional unrest can quickly influence currency values. Governments stabilise exchange rates through good monetary policies and positive trade balance.
While all currencies experience price fluctuations to some degree, these changes can significantly impact businesses operating internationally. Local and international companies must carefully manage their exposure to currency risks, as these fluctuations affect their day-to-day operations and financial performance. Many businesses implement protective measures to shield themselves from negative impacts. However, these same fluctuations can create opportunities for traders and businesses who can accurately predict currency movements using analytical tools like TradingView.
For example, a UK-based company that imports goods could make more profits if the value of the GBP increases against the currency of their foreign partner. However, if the GBP falls, they will pay more for such imports. As a result, any tool that can make them understand the best time to import goods would give them a positive financial edge.
The Impact of Currency Fluctuations
Here’s how changes in the exchange rate can impact businesses.
Cost of Goods and Services
Imports and exports are important to the UK economy. According to the Office for National Statistics (ONS), the UK imported more goods in October 2024, while exports to non-EU countries fell in the same month. When businesses import raw materials and goods or hire foreign talents, changes in exchange rates can significantly affect the costs and total amount they pay.
The GBP has steadily gained momentum against the euro, spurred by fiscal changes in the UK. The result is a stronger sterling and an economy that is poised for growth. UK businesses and consumers will benefit from these, as goods and services can become more affordable.
Competitive Edge
All businesses rely on their competitive edge, whether in the quality of their products and services or their prices. Fluctuations in the market value of the GBP can influence the competitive edge of local UK businesses by impacting the final costs of their products, especially in the international markets. Consumers may opt for other, more affordable brands if product costs increase. A loss of competitive edge can affect returns and performance, creating or worsening poor business conditions.
For businesses with foreign units, currency fluctuations may cause misleading impressions of their performance and returns, especially involving internal transfers. This could result in various challenges and even suspension of abroad activities until the exchange rates stabilise. Many businesses sell at a loss or get priced out of their markets due to irrecoverable losses caused by currency fluctuations.
Revenue and Profits
Currency fluctuations also affect revenue flows and profit margins. A higher GBP value reduces import costs and increases export revenues, while a lower value has the opposite effect. UK businesses enjoy stable revenue projections when they have stable currency rates and can take calculated risks such as loans. Businesses see their revenue and profits impacted by fluctuating rates and must implement plans to secure profitability despite rate changes.
Foreign and Local Investments
The GBP is the fourth most-traded currency globally, behind the USD, EURO, and the Japanese Yen (JPY). The close relationship between these currencies makes the GBP important in global financial trading. For instance, a steep decline in the exchange rate could influence commodity prices and trade flows between the UK and European countries. Changes in the GBP/USD exchange rate can also impact the value of other currencies pegged or linked to the GBP or USD in the forex market.
Opportunities in Currency Fluctuations
Currency fluctuations present opportunities for retail, wholesale, private, and public companies, and individuals. Changes in exchange rates allow the buying and selling of one currency for another to make profits. Here are some ways businesses can make returns during exchange rate fluctuations.
- Financial investments in GBP-denominated assets
- Attracting foreign investment
- Enhanced competitiveness
- Diversification into new markets
- Strategic pricing adjustments hedging
- Improving operational efficiency
- Leveraging high interest rates
Forex trading is a common way for businesses to explore opportunities in currency fluctuations. Banks and other financial institutions trade forex; smaller businesses can explore various investment products offered by financial institutions. Some businesses also set up investment units and employ market analysts and managers to oversee their investments.
How Businesses Mitigate the Effect of Fluctuating Exchange Rates
Fluctuating exchange rates can significantly impact operations and financial performance, especially when volatility is high. Businesses can implement several strategies to mitigate potential effects.
- Currency hedging to lock in exchange rates for future transactions, using tools like forward contracts and options contracts
- Operate multi-currency accounts to hold funds in various currencies and make payments when exchange rates are favourable
- Flexible payment terms with suppliers to mitigate the risks of price fluctuations
- Diversifying business operations and investments to spread risk and increase revenue
- Invoicing international transactions in the local currency to reduce risks of price changes
- Analysing markets and forecasting exchange rates to determine the favourable periods for sending and receiving funds
Currency Trading as a Way for Businesses To Minimize Exchange Rate Risks
Although businesses are prone to fluctuating exchange rates, they can ride the waves with proper planning and strategies that minimise exposure. Currency trading is one of the most popular ways to do this. Companies of all sizes can find favourable periods to perform transactions involving the GBP and other currencies to make the most of fluctuations.
