What does sterling’s recent rise spell out for exporters?

As I write, sterling stands at 1.27 against the euro and 1.55 against the USD. Our forecasts for GBP/EUR are 1.27 (3-months) and, again, 1.27 (12 months) while for GBP/USD they are 1.55 (3 months) and 1.54 (12 months). Sterling’s rise against the euro has come on the back unrest and uncertainty in the eurozone. 12 months ago the rate for GBP/EUR was 1.12, and that increase in its value has directly hit margins for exports.

The euro has weakened against sterling and other currencies on the back of grave uncertainty around the economies of some of its key member states. Spain, Ireland, Italy, France and, of course, Greece face significant debt issues.

And yet, while the eurozone has its problems, the UK does too. The UK economy slipped back into recession during 2012. The Bank of England’s monetary policy of quantitative easing and rock bottom interest rates are designed to help kick-start the economy but they also serve the duel purpose of weakening sterling, which helps export markets.

Looking at the bigger picture, one could sum up the exchange rate situation by saying that, while the euro hardly represents a safe haven for investors, neither does sterling. The aforementioned exchange rate predictions are based on current knowledge and that all other things will remain equal.

However - and this is the critical point – if recent months have taught us anything it is to expect the unexpected. There are a number of eminently possible events – one or more countries leaving the eurozone or the markets perhaps setting their sights on the UK’s own debt issues – which would impact dramatically on exchange rates. As many exporters will be aware, sudden shifts in exchange rates can quickly erode the profits on a deal.

Moving forward, I firmly believe an export strategy represents the best bet for businesses in an uncertain world. However, I would urge businesses trading globally to consider using hedging techniques such as forward buying as part of an overall currency strategy. Exchange rate movements will always impact on international trade generally but by planning ahead and giving some thought to currency issues, exporters can ensure that their hard work in securing and executing a foreign contract is not undone by unexpected exchange rate movements.

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