13th January 2016
Andy Scott, economist at HiFX looks at the implications of the recent fall of sterling against the euro for UK imports…
The sharp fall in the value of the Pound against the Euro since the beginning of December has caught a number of corporates off-guard, with many failing to take advantage of the GBP/EUR exchange rate whilst it was above 1.40.
We’re talking here of course about companies that import goods or services from our largest trading partner – the Eurozone. Whether it’s food products from Italy or manufactured components from Germany, UK business have large exposures to the value of sterling versus the Euro. Annual imports totalled approximately £280bn in 2014 according to the ONS.
Whilst the majority of our clients have suitable hedging in place to help mitigate the risk to their profits from a fall in the value of sterling, we’ve received a number of calls over the past few weeks from nervous business owners and CFO’s who remain exposed. The overwhelming reason given for them not having hedged their risk by purchasing Euros needed in the months ahead through a forward contract for example, was a number of banks forecasts for the Euro to weaken further in 2016.
The difficulty they now face is that the GBP/EUR exchange rate is at its lowest for nearly a year, and 7% lower than it was just a month ago when some of these companies were setting FX budget rates for the current year. The conversations we’re having are focused on the need to revise the budget rates to reflect the move in the exchange rate and trying to encourage companies to implement an FX policy that sets out hedging parameters, to avoid being under hedged and exposed to such volatility in the future.
Sterling’s fall against the Euro has been aggressive and largely due to sterling weakness as growth has slowed slightly and inflation remained low, allowing the Bank of England to remain on hold with interest rates for longer. If the market takes a more upbeat view for the Euro, we could see a move down to a more neutral valuation between 1.25-1.2850 in the weeks ahead.