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How does a weak pound affect my money?

With the cost of living already biting, the falling value of the pound over the last few months is threatening to make the situation worse.

But how does a weak pound impact your money?

How does a weak pound affect my money?

We take a look at the different ways the value of the pound can impact you.  

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What are exchange rates? 

When people talk about the value of the pound, they’re talking about how much the pound is worth when compared with other major currencies, normally the US dollar and the euro. But what does this actually mean? 

If you’re travelling abroad, it’s a good idea to swap your pounds for the local currency of the country you’re travelling to.

But if after changing your currency, you find you have more or less money than the pounds you had in the first place, the exchange rate between the pound and the local currency may have changed.  

The value of a currency can reflect a few different things, from a country’s trade balance to its inflation rate.

As the economic landscape of a market changes, so too does its exchange rate.  

Why did the pound crash? 

While the value of the pound against both the US dollar and the euro have been relatively low in recent years, following the UK government’s mini-budget in September 2022, a significant currency crash took place in financial markets.

Against both major currencies, the value of the pound fell to its lowest point in recent years, with the pound’s value against the USD briefly reaching an all-time low.  

The war in Ukraine and existing surge in inflation have been draining the value of the pound for a few months, and there were strong fears among investors and those with financial interests in the UK market that the new economic measures would lead to a weaker economy and reduced returns.

As a result, investors sold their key investments and holdings that were denominated in GBP, leading to the value of the pound dramatically weakening.  

How does a weak pound affect the economy? 

A weak pound impacts the economy in a few ways.

On the one hand, a weak pound means the Bank of England has to raise interest rates. This means that the economy slows down, and people start to save more than they spend. If interest rates remain high for long enough, it can even trigger a recession.

So, with rates higher than usual, the economy has started to slow. 

At the same time, a higher base interest rate makes the government’s day-to-day spending more costly.

Almost every government in the world has to borrow some money from its central bank to finance its daily expenses, but with the central bank charging higher interest on these loans, the governments have to pay more money back over time.

This increases the UK’s national debt. 

How does a weak pound impact your mortgage? 

As the cost of borrowing money increases, banks pass on this higher cost through their loans and mortgages.

Although for homeowners paying back fixed-term mortgages, there may be no immediate increase in interest rates, for anyone on tracker or variable-rate mortgages, there has been an immediate increase in the interest rates to pay.  

So, with many mortgages becoming more expensive, it has become harder for many people to buy properties, particularly first-time buyers. 

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How does a weak pound impact your pension?  

Depending on how you receive your pension income, a weak pound could negatively affect your income in two main ways.

As mentioned above, with the value of the pound sinking, interest rates usually need to rise.

And between these higher interest rates and the already high levels of inflation, the money you will be drawing from your savings won’t necessarily be enough to cover the expenses that you have already planned for.  

Moreover, your pension planning will also be negatively impacted if you have savings invested in private investments.

With the pound dropping, these investments have been hit hard and have reduced in value, meaning that the value of your savings may have been directly affected.  

How does a weak pound impact your investments? 

A weak pound could mean different things to different investors, so it isn’t always easy to say exactly how the value of the pound will impact your investments — it depends on what you have invested in.  

When the pound loses value, it means that international businesses can afford to buy British products and services for less, making it more attractive to buy British goods and services.

When foreign investments rush into the UK, this can fuel a quick recovery in the pound’s value.

So, if you have invested in a company that exports internationally, or is planning to, your business may become more valuable thanks to the drop in the pound.  

On the flipside, a weak pound can be damaging for companies that import goods from abroad and for those with supply chains around the world.

A weaker pound can also push inflation higher as the UK imports more than it exports, meaning that the cost of producing goods gets more expensive.  

How can you protect your money? 

Basing your savings goals on exchange rates isn’t a viable way to protect your money and to save for the future, as they can change rapidly.

And while a weaker pound can have an effect on your financial future, there are ways for you to protect your money.  

With the cost of living biting, keeping your financial goals on track isn’t easy. But speaking to a financial adviser can help.

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About the author
Kate has written for leading publications and blue chip companies over the last 20 years.