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FinanceWhat does a falling pound mean for the global economy?

What does a falling pound mean for the global economy?

The British Pound sterling (GBP) is an important currency in the global financial system.

GBP is one of the major currencies along with USD, EUR, JPY, and others. Pound is used by many countries as a reserve currency. The UK is the global financial hub for Forex and European stocks trading.

The United Kingdom has historically played a significant role in the global economy and continues to be an important participant in the global economy.

Effects of falling GBP

The British Pound sterling is in a downtrend against major currencies. The depreciation of British Pound Sterling can have several implications for the UK and global economy:

Inflation

A weaker pound can contribute to higher inflation in the UK. When the value of local currency decreases, the cost of imported goods increases and consumers start spending more on locally produced goods. High inflation hurts the local economy, it makes planning and price calculations difficult for businesses and individuals. It is likely that the Bank of England will keep strict monetary policy to try to counter the falling pound.

The strict monetary policy makes it costly for the citizens of the UK to take out loans. Less money in the consumers’ pockets means less income for the British businesses. When businesses suffer, they start laying off workers, which damages the economy even further.

The economy of the UK and European economies are strongly tied. Weaker GBP can impact the value of the Euro. Falling GBP is a bad sign not only for the UK but also for Europe.

Tourism and Foreign Direct Investments (FDI)

Weaker pound sterling can attract more tourists and investors from all over the world. In addition, investors might find British company stocks attractive, as they become cheaper during hard times.

Tourism plays a significant role in the UK economy and contributes to its GDP and employment. It’s worth noting that the Covid-19 pandemic has significantly impacted the tourism sector in the UK and globally. Travel restrictions, lockdowns and limited international travel have led to a decline in tourism activity from which the country is not yet fully recovered.

Trade balance

The falling pound will make imports more difficult and exports from the country much easier, as local producers have less money to spend on workforce and production. While it’s true that trade has been decreasing between the UK and Europe, the numbers remain significant. According to the UK parliament, by 2022, the EU accounted for 42% of UK exports. This figure was much higher prior to Brexit. Between 1999 and 2007, the EU exports number was 50-55%.  European exporter companies in the UK will be the first to feel the hit from the falling pound.

How to benefit from the falling pound

Deppretiation of the GBP can be bad for the UK’s economy, however, retail currency traders can benefit from it. If you are new to Forex trading, it should be mentioned that traders need to have realistic expectations on returns of the FX market.

The British pound is actively traded against major currencies. The most trade volume has GBP vs USD pairs and GBP vs EUR pairs. High trading volume and good liquidity means that you can trade those pairs with minimal spreads. It should be mentioned that the Euro and British Pound are positively correlated due to the many factors we have already mentioned above, such as economic and political ties. Traders interested in making profits from depreciating GBP will find better market moves by trading GBP against the US dollar, or other major currencies such as, Japanese Yen, Canadian Dollar, Swiss Franc, New Zealand Dollar, and Australian Dollar.

Things to consider when trading GBP against major currencies

  • Volatility: GBP is a highly volatile currency. Its volatility depends on various factors, including economic and political events, Brexit, and good liquidity.
  • Risk management: managing risks is crucial for success in currency trading. Never risk the capital you cannot afford to lose in trading, always use stop loss orders and choose a proper risk to reward ratio.
  • Have a trading strategy: successful traders plan their trades and trade their plans. When you have a trading strategy, trading decision making becomes easier.
  • Learn trend following strategies: since the GBP is in a falling trend, strategies and indicators that help traders find entries in a trend are even more important.
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