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4 October 2016

The pound is plummeting – should we panic?

Foreign currency investors are watching the Tory party conference closely. 

By Julia Rampen

The Conservatives are pretty fond of the British pound sterling, but their party conference has sent the UK’s currency plummeting.

Theresa May’s revelation that she will trigger Article 50 before the end of March 2017 sent sterling crashing, and it has been on a downward spiral since. On 4 October, the pound was at $1.28, the lowest level since 1985. As for euros, a pound will now buy you just €1.42. 

So what does this mean – and is it as drastic as it seems?

Why is the pound so weak?

First, it’s important to remember that investors – like the general public – knew hardly anything about what Brexit might look like before Sunday. The idea that Britain may be heading for a hard Brexit was always going to be a surprise, and this is reflected in the currency markets. 

But it’s also worth pointing out the pound’s value against the dollar fell off a cliff edge after Brexit, and has basically wandered dazed and confused on the sands below ever since. This week’s tumble is nothing compared to June. The pound was worth $1.50 on the eve of Brexit, and four days later it was worth just $1.32. 

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This isn’t just because of market jitters. The Bank of England has been busy over the summer. It has cut the official Bank interest rate for the first time since 2009, and pumped money into the economy to stave off the impact of Brexit. 

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While the reasons for it are complicated, the effect of such measures tends to be a depreciation of the currency. 

Is it good or bad? 

It depends who you are. If you are making Highland malt whisky, it’s a boon, because you can sell exactly the same product cheaper abroad. If you’re, say, a Ukip MEP with a salary denominated in euros, it’s time to celebrate. 

The flipside of that is anyone who needs to buy products made abroad suffers, whether that’s a grocer importing exotic fruit and vegetables, or a manufacturer importing specialist tools. And if you’re a British pensioner living in Spain, your salary will buy much less.

As for tourists, a quick scan of holiday money comparison sites today suggests that even the best deal will only give you €112 for £100. 

Why is the stock market rising?

One of the confusing features of today’s markets is that while the pound has plunged, the FTSE 100 has soared to 7,117 points – the highest level for more than a year. Why?

The fact is, although we associate the FTSE 100 with the health of the UK, it’s made up of multinational firms such as BP and Coca Cola. These companies make huge revenues overseas, which translated into the weak pound look even bigger. 

Markets may also be reacting to the Chancellor’s promise of a direct housebuilding stimulus, which means more work for house builders, DIY shops and other property-related businesses. 

The Bank of England’s monetary stimulus may also play a part. Convinced that the state is committed to prop up the economy, and frustrated by low interest rates, investors tend to pile into shares. This may be what is happening now.

What about the IMF forecast?

After dire warnings about Brexit, the International Monetary Fund shamefacedly revealed that it expects the UK economy to be the fastest growing out of the G7 this year.

But Brexiteers should not feel too smug. The same report downgraded its growth forecast for 2017 – when Brexit kicks in – to 1.1 per cent.