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What does a falling pound mean for savers and investors?

With the pound falling to its lowest level against the dollar since July 2020, we look at what a falling pound could mean for inflation, stock markets, pensioners, and holidaymakers.

Important notes

This article isn’t personal advice. If you’re not sure whether an investment is right for you please seek advice. If you choose to invest the value of your investment will rise and fall, so you could get back less than you put in.

Matthew Taylor
Content Editor

Published on 23 May 2022

This article is more than 6 months old

It was correct at the time of publishing. Our views and any references to tax, investment and pension rules may have changed since then.

The value of the pound can be a good way to tell how well the UK economy’s doing, particularly when you compare it to other currencies.

The Bank of England (BoE) recently raised interest rates to 1% – the highest they’ve been since 2009. On top of an interest rate rise, the bank also warned that the economy is at risk of a recession. These announcements caused the pound to slide 2% against the dollar to its lowest level since July 2020.

But what does this mean for savers and investors? Here’s a closer look.

This isn’t personal advice. If you’re not sure what’s right for your circumstances, ask for financial advice. Remember all investments and any income they produce can fall as well as rise in value, so you could get back less than you invest.

The impact on inflation

Susannah Streeter, Senior Investment and Markets Analyst

The falling pound risks piling on inflationary pressure at a time when soaring prices are already a cause for concern among consumers and companies.

If sterling is weaker, it means it’ll be even more expensive to buy imports of goods and services priced in dollars.

This comes at a time when the commodity chaos unleashed by Russia’s invasion of Ukraine has pushed up the price of raw materials produced by the two countries. From crude oil to wheat and from nickel to neon, costs have spiked and stayed highly volatile as supply worries continue.

The price companies are already having to pay on exchanges for these essential ingredients and components have soared, and the falling pound risks making them even more expensive. Some companies have been managing to absorb costs and limit what has been passed onto consumers, but lots have warned they’ll soon have to put up prices.

This risks pushing inflation up further. Although the BoE hopes that by raising rates, it will dampen demand and potentially lead to lower prices, the impact could be more limited. That’s because lots of goods affected by escalating costs are essential items, so consumers have little choice but to keep buying them.

Other businesses reliant on discretionary spending are likely to be hit by rising inflation. Especially if their customers are mainly people on middle and lower incomes who might be forced to drop little luxuries. Companies with a strong brand presence might be more able to pass on costs to customers. Those with a wealthier client base might also be more resilient, as they’re less likely to be deterred by sky high ticket prices.

What does a fall in sterling mean for UK investors?

Sophie Lund-Yates, Equity Analyst

A fall in the value of the pound isn’t automatically bad news for the UK market.

For companies that rely on international business as a big portion of their income, falling sterling can be a benefit. A weaker pound means those overseas revenues buy more pounds when exchanged back into sterling.

This is an important dynamic for the FTSE100 in particular. A large chunk of the FTSE100’s revenue comes from overseas. This is why in usual times, the UK market has actually risen when our currency weakens. If you’re wondering why the FTSE100’s so heavily weighted towards overseas revenues, it’s largely because London is the official home of some of the big oil and gas majors, and some international banking giants.

The negative effects of a weak pound are felt by UK-focused companies that rely on imports. Supermarkets and clothing retailers are a prime example. These businesses must buy in products from abroad at international prices, to then be sold at a weaker UK price. If these businesses decide not to, or are unable, to raise prices in line with this, then margins suffer.

This is a particular head-scratcher at the moment, when other factors are already meaning retailers are seeing huge cost inflation for a host of additional reasons.

What should investors remember?

Ultimately, weaker sterling doesn’t mean the UK market is doomed. Investors should remember that big, international-facing businesses tend to be in a better position when the pound is weaker. Smaller, UK-focused retail companies are likely to feel the worst of the challenges in the short term.

What does it mean for pensions?

Helen Morrissey, Senior Pensions and Retirement Analyst

As we’ve seen, a falling pound impacts certain investments more than others. At times like this, it’s important for pension holders to keep their cool. Pensions are a long-term investment. Making short-term knee-jerk reactions to market movements can cause more harm than good. You risk increased costs, without necessarily getting better performance.

Pensions should be invested in a portfolio that’s well diversified in terms of geography and sector. Making sure you’re properly diversified is key. It should offer some shelter against market turbulence from a falling pound.

Diversification – it takes more than a handful of stocks

As we’ve mentioned, a falling pound can also push up inflation. This can eat into the purchasing power of pensioners’ income. We’re seeing this happening now with inflation currently at 9% and expected to rise further still.

One group that will need to monitor the situation carefully is pensioners living abroad. The downward trend in sterling will see their UK pension income worth less when transferred into overseas currency. This could have a real impact on their spending power over the coming months.

Review how much you’re taking from your pension

What it means for holidaymakers and what you can do about it

Sarah Coles, Senior Consumer and Personal Finance Analyst

Currency market movements can strike fear into the hearts of holidaymakers, who risk having to scale their spending plans back dramatically if rates move against them.

You can never guarantee to exchange your money at exactly the right time, but some people choose to buy it in tranches, so they avoid making the trade at exactly the wrong time. One easy way to do this is with a prepaid holiday currency card, onto which you can load your euros or dollars regularly. You might have to pay for the card, so check for fees.

However, while exchange rates make a huge difference to how much you get for your money, how and when you exchange your cash can have an even bigger impact. If you wait until the last minute, and exchange it at the airport, you can end up paying 30% more for your money. So you might be able to make up for the falling value of the pound by working as hard as possible to get a decent exchange rate.

You could consider a specialist credit card or debit card, with no fees for spending or withdrawing cash overseas. These often offer a far better exchange rate than you’d ever get through a bureau de change. It might seem an odd choice to open a current account purely for your holiday spending money, but for some people, the cash saving is worth the extra admin.

If you’d rather carry notes and coins, it pays to plan ahead. You can get a significantly better deal if you pre-order it for delivery or collection. It’s worth shopping around for the best possible exchange rate.

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