Tuesday 10 December 2019

Q&A: Uneasy times for sterling but why should we in Ireland care?

Euro worries: ECB boss Mario Draghi. Reuters
Euro worries: ECB boss Mario Draghi. Reuters

Colm Kelpie

Q: What's going on with sterling?

A: The UK currency is having a troubled time. Although the pound has its swings against the world's other major currencies on a day-to-day basis, the overall trend in recent months has been one of weakness.

Sterling has been losing value against both the euro, since November, and the dollar from even earlier, for two reasons - the dwindling expectation that the Bank of England is going to raise interest rates for the first time since the onslaught of the crisis, and, probably the more pertinent explanation, investor jitters over the impending vote in Britain on whether to pull out of the European Union.

The uncertainty surrounding the vote is making currency watchers very nervous. They fear if Britain opts to pull out of the EU, sterling will drop in value, which has precipitated a sell-off. And that in itself is putting pressure on the currency's value.

In July of last year, €1 was worth 69 pence and £1 would buy you $1.59. Yesterday, €1 was worth 78 pence and £1 got you $1.41.

Q: We use the euro, so why should we care what happens in another currency?

A: Because currency fluctuations affect us when we travel outside the eurozone, and we do that when we cross the border to Newry or Derry.

That day trip to Belfast for shopping becomes either more expensive or cheaper, depending on what's happening with sterling. And for the thousands of Irish businesses selling into the UK market, currency fluctuations play a big factor in terms of margins.

Q: Who benefits and who are the losers?

A: If you're travelling to the UK, a weak sterling against the euro is good for you. You get more bang for your buck. But the flip side is true for British tourists coming over here. A weaker sterling means it's more expensive to travel to eurozone countries for UK holidaymakers, which isn't good news for the tourism industry. And it's also not good for Irish businesses selling into the UK market for that same reason. A gain in the euro against sterling cuts margins for Irish exporters selling into the UK.

Q: Will the pound continue to weaken?

A: It's safe to say that for the next four months - at least, until the UK's in/out referendum - you can expect volatility. Interestingly, yesterday, as markets digested the news that Boris Johnson was backing the exit campaign, the big swing was sterling/dollar.

Sterling/euro weakened, but it was much of the steady weakening that we've been seeing over the last few months. If the British vote to leave the EU, experts believe that will have a much more dramatic effect on the pound. US investment bank Goldman Sachs warned sterling could weaken to as much as 90 pence versus the euro. The other point worth mentioning is that a stronger euro is not only a headache for Irish exporters, but also the European Central Bank. Mario Draghi has been hoping a weaker currency would help boost growth.

Irish Independent

Also in Business