British manufacturers and other UK-based SME’s are concerned with recent plummeting of the GBP over the course of the past few months in light of a the “Brexit” referendum to be held in June.
Although the referendum was already announced in 2013, the Pound has begun to show extreme instability only from January 2015. At first, it climbed from 1.27 Euro to Pound to 1.4 Euro to pound over a course of a 3-month rally. It fluctuated during the year and almost finished up strongly with a record 1.42 GBPEUR rate in November, but then crashed to a rate of 1.38 in December, only to further decline to a 2-year low of 1.26 on February 22.
Since February 22 the GBP has shown a small increase against the Euro, and made a 5-point increase against the Dollar, so some expert predict the Pound is expected to recover, but they all agree a Brexit would further affect it to a large extent. Currently, some UK small business oppose a Brexit while others don’t mind it but it’s the public who would have the last word. Current surveys show 52% support for a Brexit, but a lot can change until the referendum will actually take place.
Manufacturers, importers and exporters which are baffled with the volatile forex market are seeking out for the help of professional brokerages which offer a variety of hedging tools specifically tailored for this audience. The most popular FX option that is used in such scenarios is a Forward Contract which fixes today’s rate for a period of up to 12 months, but there are other additional means of hedging with a possible upside if the market moves in the client’s favor. For instance, signing up with a brokerage and asking your corporate FX broker to follow up on the market and execute certain orders only when a certain rate has been reached.
Although the Pound is a solid currency, one of the 8 major currencies in the world, and the fact the UK is among the strongest top 10 economies in the world (as elected by the Huffington Post), a Brexit could mean unprecedented lows for the GBPEUR and GBPUSD. It won’t be anything like the Egyptian Pound which has dropped 8.8% recently in a single day, but in a 3-month period following a positive Brexit referendum it may drop in 15-20% of its value. It may also gain tremendously against these currencies if the Brexit referendum decides the UK will stay in the EU.
To summarize, the Pound is expected to remain volatiles and if you are exposed to it (either as a seller or a buyer), you may want to consider mitigating that risk.