Currency Fluctuations and the Impact on UK Trade

Currency - Express Van

A currency itself holds no intrinsic value. The value of a twenty-pound note only remains true as long as those who use it collectively share the belief that the currency has value. This is in contrast to metals such as gold or silver which hold an intrinsic value.

On the international stage, currencies are measured relative to each other. If the pound sterling depreciates against the Euro, then one Euro will be equal to a greater number of Pounds Sterling. This simple concept has led to and now dictates the pattern of trade that exists across the world today.

Minor fluctuations of currency are relatively commonplace and are a normal occurrence throughout the working day and this has very little impact on international trade. In some situations, fluctuations are severe, and this certainly can impact on trade.

The UK Import/Export Market

The UK’s largest single trading partner is the European Union. The vast majority of EU nations are part of the Eurozone and make use of the Euro as their national currency. This is positive for the UK as a significant amount of trade requires the analysis of only one currency relationship, Pound Sterling to Euro.

This creates a lot of stability, a welcome component of international trade.

Fluctuations and Trade

Taking the Euro/Sterling relationship as an example, the impact of a depreciation of the Sterling’s value is rather simple to understand.

One pound sterling would now buy fewer Euros and therefore this would make Eurozone products more expensive to UK consumers and businesses. This would inevitably reduce the level of imports at least in the short run. This is one of the main concerns surrounding Brexit as the Pound Sterling’s value is under threat amid economic uncertainty keeping in mind the UK is a net importer.

Conversely, the lower value of the Sterling would make UK exports cheaper and therefore cause an increase. This would have the effect of increasing demand within the UK economy and stimulating GDP growth. In this case, inflationary pressures may too grow and this would need addressing to maintain stability.

Long Run vs Short Run

Decisions are made by humans who are able to rationalise a situation. If a currency fluctuation increases prices, this is only likely to change the overall trade patterns if this effect is sustained over a period of time. Short-term shocks will be felt, but won’t be enough at low frequency to have a trade-altering impact.