Leveraging FX solutions in the face of a volatile pound

With recent ONS GDP data estimating that the UK economy shrank by 0.3% in August compared to July, the Bank of England now says the country will soon enter its longest recession since records began.

The year has been defined by global turbulence and economic volatility - with events like the war in Ukraine and the UK's series of new prime ministers adding to the chaos. This means businesses will need to plan carefully to ensure the sustainability of their organisations.

However, the threat of a recession need not sound the death knell for businesses. Managing currency exposure and minimising risk can ensure survival and even open up the possibility of corporate growth.

Currency implications for businesses

After Chancellor Kwasi Kwarteng’s mini-budget in September we saw the pound reach an all-time low against the US dollar, plummeting nearly 5% to its lowest rate ever of $1.0327 as confidence in the UK’s economy and currency declined across the board. 

GBP briefly rallied following Jeremy Hunt’s reversal of Kwasi Kwarteng’s tax cuts, however, subsequent government reshuffles and the possibility of a snap election are now set to throw further volatility into the mix, placing increased pressure on small businesses.

With such high volatility comes an equally high amount of risk for businesses trading in sterling. For importers and exporters in particular, any sudden change in exchange rates could see a profitable deal suddenly lose value, or become highly unprofitable and result in losses. More significantly, volatility could severely hinder a businesses’ client and stakeholder relationships. Minimising risk is therefore not just a case of profitability, but future growth.

Mitigating FX market volatility

With such seemingly endless uncertainty in the market, and significant currency fluctuations a daily occurrence, keeping risk within workable boundaries is a constant challenge for SMEs.

Planning ahead to minimise exposure and ensure sustainability for your business is more important than it’s ever been.

There are no signs of the UK’s political situation resolving anytime soon. Further volatility of the pound is likely - and this means increased risk for SMEs.  Thankfully, there are a number of solutions businesses can use to minimise FX risk while keeping them open for potential market opportunities, including forward currency contracts and hedging services.

With a forward currency contract 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 and subsequent unforeseeable market fluctuations.

FX services such as spot trading, options and hedging can likewise help businesses further minimise losses, whilst other tactics could include trading via additional or alternative markets where there is less volatility. 

Regardless of the route businesses decide to take, ensuring they have a reliable FX partner and detailed plan is a powerful asset in times of turbulence.

Finding a bespoke FX partner

With a plethora of FX providers and new fintechs in the market all offering similar services, it can be challenging for businesses to find the right partner to fulfil their FX needs. 

It’s therefore important to consider two key things: the immediate needs of the business, and what future events might require FX risk mitigation.

A partner that looks ahead and helps to anticipate market fluctuations, but also looks historically will be invaluable in today’s landscape. With many banks often taking reactive approaches to FX, it’s vital to find a partner that acts proactively in the face of economic events. In practice that means being notified of potential loss making before they happen, and ensuring an FX plan is in place.

Ultimately, surviving the recession will all boil 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.

None of the information contained in this article constitutes, nor should be construed as financial advice.

Moneycorp is a trading name of TTT Moneycorp Limited and is authorised by the Financial Conduct Authority under the Payment Service Regulations 2017 (reference number 308919) for the provision of payment services.