Why is the pound falling and does it matter?

Sterling has been in apparent freefall of late, as currency traders have looked at the UK economy with increasing pessimism. Left Foot Forward explains what a falling pound means for the UK.

Following the announcement at the weekend that the UK was to lose its triple AAA credit rating, it was expected that the pound would take a pummeling on the currency markets this week.

And initially it did.

Yesterday Sterling fell against the dollar to $1.5073 – it’s lowest level since summer 2010.

As yesterday’s trading went on the pound rallied slightly to 1.16 versus the Euro.

As of lunchtime today (Tuesday 26th) £1 buys 1.1574 Euros.

But why does it matter?

A cheaper pound bodes well for exporters, who are able to target the overseas market with competitive prices. Plenty of countries with struggling economies would like nothing more than a weak exchange rate in order to export their way back to prosperity.

This is one reason why the Japanese Yen is currently being deliberately depreciated by Tokyo.

To cite an example of how a falling pound is welcomed by sections of the business community, FT economic commentator Martin Wolf greeted the news that Sterling was falling rapidly thus: “Sterling is falling. Hurrah! The economy calls for a further depreciation.”

The downside is that, as real incomes fall (and demand falls with it), even a significantly lower pound may not be sufficient to fill the export order books of British businesses. The benefits of a weaker currency may be offset by weakened demand in important export markets.

The depreciation in sterling is good news for the tourist industry, however; and it may even encourage an outflow of migrant workers from the UK, reducing the immediate pressure on unemployment numbers.

And yet the fall in Sterling will cause import prices to rise, impacting those businesses who need to import raw materials.

Ultimately, the most noticeable impact will be on working people whose take home pay has not kept pace – prices have already risen at a rate faster than incomes for the past four years, and incomes for the squeezed middle are now at the same level as they were in 2002/03.

And the cause of the drastic fall in the value of the pound?

As Larry Elliot writes in the Guardian:

“Investors have not suddenly woken up to the idea that Britain is a flat-lining economy with a twin deficit problem. They have known that for some time. The difference is that a year ago there were other more pressing things to worry about. Now there are not. That makes the pound a big sell.”

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21 Responses to “Why is the pound falling and does it matter?”

  1. ShaunRichards

    A basic cursory check on the markets would show that the pound closed last night at around 1.16 versus the Euro. So rather inconveniently for whoever checked this (if anyone did) it closed UP rather than down.

  2. LB

    working people whose take home pay has not kept pace


    Yep, that’s because you’ve been screwing them with tax on tax on tax …

  3. Mark Reilly

    Yes but there was a significant sell off over the last two weeks. ..it would be wring to look at an intraday movement the daily timeframe is more illuminating
    As noted we are at a 2 year low.

  4. henrytinsley

    Tax aside, there’s lots of evidence to show that peoples’ incomes have declined in recent years. That, sadly, is what happens in recessions.

  5. LB

    Maybe. From the evidence I’ve seen this is primarily a private sector issue. The public sector got rises.

    Now for scale. What’s people’s biggest cost? It’s tax. By a long way.

    Given that’s been ramped up its the major cause of people being poor.

    It’s then a circular argument. The public isn’t spending. The government must spend. We must tax to spend. Er, the public is taxed even more, and spend even less.

    It’s a baloney anyway. Keynes says, borrow and spend. We’ve had 150 bn a year of borrow and spend, with no result.

    The reason is it is economic voodoo. Problems caused by borrow and spend don’t get cured by more.

  6. Mick

    Labour people bitching and whining about the Pound. After their handling of the economy worsened our chances during the credit crunch, by lacking funds in the Treasury and selling off 2/3 of all our gold at jumble sale prices! That last one right during the boom times.

    Great stuff. Pure class. And now people in Labour get behind Ed Balls and his howler money Red pals, who screamed at Mr. Osbourne in the House for not ramping spending even further. The kind of thing Balls himself did to get Britain INTO this mess.

    Turns out we lost our triple-A by not getting to grips ENOUGH. State handouts are £208 billion a year and the private sector could do with some tax cuts to grow.

    (THAT’S one thing Labour should have done – cut taxes to cut supplementary benefits and stuff. But then, left wing ballcocks love reliance on the State. Look at their love of Keynsian economics, dictating that State has the responsibility to get you a job.)

    There’s a whole lot of mess to clear up, not helped by constant left wing bitching, just because George Osbourne is a Tory.

    Honestly, there are no swear words foul enough to hurl at people in Labour. And even then, I’d come a cropper as the new Left have hate and names down to a fine art. (Some of them are now even legal terms.)

  7. Mick

    “Ed Balls and his howler MONKEY Red pals”, it should say. But still, left wing ponces still howl about money they can rarely manage.

  8. Newsbot9

    That’s right, keep moaning that your right don’t have all the money. Keep praising your casino banker gods!

    Keep on backing your Tories, who called for less bank regulation. Worse than Labour, well done (Takes work!). And keep on lying about our AAA being cut because you didn’t kill enough, it’s because “Plan A” is not working. A credible plan – one which will actually LOWER rather than RAISE the debt as you’re demanding…

    Of course there’s no attack you won’t make on anyone outside your ideology. Keep whining about the poor being alive!

  9. Newsbot9

    Keep on talking up your wonderful Tory plan to pay more tax, have less services AND a higher debt. Keep trying to nuke the greenhouse.

  10. Newsbot9


    Ah yes, seven years and counting of sub-inflation rises and massive job losses. But it’s never enough

    Keep lying – the biggest costs are housing, utilities, transport and food.

    Your argument is we need a failing economy, Torynomics, It’s not working. Satanists like you have failed, time to fix things. Time to take away the NON-kenysian pork-barrel projects and to re-instant cost-saving measures.

    And of course deporting serious criminals like you.

  11. Newsbot9

    You don’t get multiple recessions without Government incompetence, though.

  12. Mick

    Who does? But I can moan about Newsbot being alive, if that’s compromise enough.

    And considering Britain last lost its triple-A under Labour, and we lost it now because the Tories inherited a broken Labour economy, you walk some slippy slippy ice. A run on the Pound is now to be avoided and any plan Labour comes up with can only guarantee it.

  13. Mick

    Labour are past masters, so Newbot knows.

    And when Labour do it it’s expected. When Tories do it, it’s disappointing.

  14. Newsbot9

    Nope, you’re a good totalitarian, telling everyone what everyone else “knows”. Can’t allow unapproved knowledge, after all!

    Keep on talking up how “unexpected” the economy is. When it was predicted and predictable.

  15. Newsbot9

    Of course, I’m Jewish. You will moan about me being alive regardless of the situation.

    And of course you’re greasing the slope. You also have to make excuses for the Tory’s economic incompetence, given you share it.

  16. Mick

    No, I can moan about you being alive for being an anarchist, if it was worth it. Though for somebody claiming to be so sure of his policies, you do play victim a lot. You’ve whined and smeared an awful lot here, something only your psychologist could reason.

  17. Mick

    Well, takes one to know one. So you may feel like explaining why you mutualists feel it’s right to dictate that all of society can exist on a barter economy.

    You’d have to order millions to change the way their lives work just to suit your whims.

  18. Newsbot9

    Right right, excuses. And I see, you just want to murder a few hundred million offhand.

    And of course you think you’re an internet psychologist, when in reality you’re simply a bigot and a racist.

  19. Newsbot9

    Ah yes, typical equivalence attacks.

    And we don’t. We don’t dictate, and unlike you we have no intent on forcing anyone into a barter economy – money is GREAT, the free market is great.

    It’s totalitarians like you who are the ones who are trying to change peoples lives for the worse.

  20. Mick

    Insults? Ah, so Newsbot proves he’s the one who makes excuses.

    Off-topic Newsbot, nothing else besides.

  21. Newsbot9

    That’s right, you’re off-topic. And keep claiming I’m down at your level. You’re trying to drag Britain there, rather.

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