Business
FX solutions will be a key leverage for businesses against a volatile pound
Published : 2 years ago, on
By Koen Vanpraet, CEO EMEA at Moneycorp, a world-leading payments and FX fintech helping businesses to navigate the complex global payments market.
With ONS GDP data estimating the UK economy shrank by 0.3% in August compared to July, a recession seems likely.
However, the threat of recession and weakening GDP doesn’t necessarily sound the death knell for businesses. Managing currency exposure and minimising risk will be of key importance to guarantee the survival of businesses.
And now, with significant economic events – such as the ongoing War in Ukraine, the recent resignation of Liz Truss as Prime Minister and fresh confirmation of Rishi Sunak as her successor – also adding further turbulence to the global environment, businesses will need to plan carefully to ensure the sustainability of their organisations.
Currency trends and the implications for businesses
So far this year, the pound has seen a significant degree of fluctuation resulting in economic turmoil for the UK economy and businesses. Continued international tensions, rising fuel prices, and the challenging political situation in the UK have all contributed to the volatile markets we have seen in recent months.
Most recently, we saw the pound reach an all-time low against the US dollar when a slew of tax cuts and spending measures were announced in Chancellor Kwasi Kwarteng’s mini-budget in September. With the pound plummeting nearly 5% to its lowest rate ever of $1.0327 as confidence in the UK’s economy and currency declined across the board.
While GBP briefly rallied following Jeremy Hunt’s reversal of Kwasi Kwarteng’s tax cuts, the resignation of UK Prime Minister Liz Truss, subsequent government reshuffles and the possibility of a snap election are set to throw even more volatility into the currency markets, placing increased pressure on small businesses.
And with such high volatility comes a corresponding amount of risk for businesses trading in Sterling. For importers and exporters in particular, any sudden change in exchange rates can see a profitable deal suddenly lose value, or in extreme cases, become a highly unprofitable one that actually results in losses. In addition, when completing transactions and payments, minimising risk when transacting in multiple currencies is crucial for maintaining not just profitability, but also client and stakeholder relationships.
Steps businesses can take to mitigate against FX market volatility
With such seemingly endless uncertainty in the market, and extreme currency fluctuations becoming a daily occurrence, keeping risk within workable boundaries is now a constant challenge for SMEs.
In such a context, planning ahead to minimise exposure, and ensure sustainability for your business is arguably more important than it’s ever been. Thankfully, there are a number of solutions businesses can use to help mitigate, and minimise FX risk while also helping them keep an eye out for market opportunities.
With no signs that the UK’s political situation will resolve anytime soon, there is no doubt more volatility in the pound to come over the coming weeks and months – which means increased risk for SMEs. FX products such as forward currency contracts and hedging services can benefit businesses seeking more certainty during this period.
With a forward currency contract, for example, a business can fix the exchange rate for a trade or transaction at an agreed rate. By doing so, they can place themselves in a better position to manage their outgoings or income, establishing a stronger foundation from which to deal with unforeseeable market fluctuations and other external variables.
Many FX providers also offer services including spot trading, options and hedging to help businesses further minimise losses, and subsequently maintain business relationships. Other tactics could include trading via additional or alternative markets where there is less volatility.
Regardless of the route you decide to take as a business, however, ensuring you have a reliable FX partner and detailed plan in place must be a core part of your strategy.
The benefit of using a bespoke FX solutions provider
With a plethora of FX providers and new fintechs in the market all offering similar services, it can be challenging for a business to find the right partner that can fulfil their specific FX requirements. Service and efficiency should be at the core of any successful FX relationship.
When looking for the right FX partner, it’s therefore important to consider two key things: what your immediate business needs are, and what events lie in the future that could require you to minimise your FX risk in the long term.
A partner that can not only look ahead and help you anticipate market fluctuations, but also look historically at currency markets and understand your unique requirements will be invaluable in today’s landscape. With many banks often taking reactive approaches to FX, Moneycorp has built a specific position for itself around proactively supporting its customers with their individual needs. In practice that means we notify our clients of potential market events before they happen – not after – and give them the tools and the knowledge to act when it matters, and in turn minimise losses.
Ultimately, it all boils down to being prepared in the face of uncertainty. Understanding your options as a business, and the FX services available to you, are two essential steps for ensuring you are as equipped as you can be for whatever is thrown your way. It’s about knowing what you can, and preparing for what you can’t.
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