Q&A - What are the implications for UK businesses if the pound strengthens?

A good way to look at what happens if a currency strengthens (an increase in the exchange rate) is to work through an example.

Brandon Ltd imports electronic goods from the US for sale via a UK website. These goods are invoiced in US$ - and that is the currency that Brandon must use to settle the invoices. Each month they pay their American suppliers approximately $100,000 for goods imported into the UK.

What is the effect of the strengthening pound in the table above on Brandon Ltd? Let’s convert the monthly US dollar payment to suppliers ($100,000) into pounds to see how much Brandon has to pay:

In June, Brandon Ltd needs to spend £62,500 to pay for their $100,000 of imported goods from the US. This is £8,928 less than in January. That means, for Brandon ltd, the cost of imports has gone down. A strengthened pound has led to cheaper imported goods – that’s good news for Brandon Ltd (they should be able to make a better profit margin on those imported electrical goods).
If a strengthened exchange rate is good news for an importer like Brandon, what about a business that sells from the UK to the USA – an exporter?

Take the example of Huntington Plastics Ltd. Huntington exports moulded plastic components to customers in the US, invoicing in US dollars. What would the effect of a strengthened exchange rate be for Huntington?

If Huntington received $100,000 in sales in January, they could be converted into £71,428.
But in June, the same $100,000 of sales would only be worth £62,500. That’s bad news for Huntington. A strengthened pound has resulted in lower sales.

If Huntington were to invoice their exports in pounds rather than dollars, then they might not be directly affected by the changed exchange rate – since there are no foreign currency receipts to convert back into pounds. However, the business might still suffer, since the price of Huntington products would be more expensive for US customers, who might then buy less (perhaps buying from a cheaper domestic supplier).

Let’s summarise:

A stronger pound leads to:
- Imports being cheaper
- Exports dearer (more expensive)

Here is an acronym that can help you remember that: SPICED

S - Stronger
P - Pounds
I - Imports
C - Cheaper
E - Exports
D - Dearer

What happens if the pound weakens (i.e. falls in value against other exchange rates)?

The answer is – the opposite of a stronger pound.

- Imports become more expensive for UK importers
- Exports become cheaper in overseas markets.

Simple!