Total Business Magazine

Pound vs Euro: Kicking Currency Risk Into Touch Around Brexit

The Six Nations – Europe’s showpiece Rugby tournament – is currently gripping viewers across the continent. However, whilst fans are singing ‘Swing Low Sweet Chariot’, the markets will be keeping an eye on another contest and a different kind of swing; that between the pound and the euro.

The reason for this? Brexit, of course. Since the result of the referendum in 2016, the pound has dropped 13% against the euro and the two currencies have see-sawed, rising and falling in reaction to votes in Parliament or mere speculation surrounding ongoing negotiations for the UK’s departure from the European Union.

Recently, the pound reached its strongest position in almost two years, after the Prime Minister promised to allow Parliament a vote to block the prospects of a no-deal, and even delay Brexit, reaching 1.16 against the euro. But surges like this have often proven fickle. Just a couple of weeks ago, the pound plummeted after the Cooper amendment (intended to prevent a no-deal scenario) was rejected by MPs, sending it tumbling to 1.3 against the euro. Therefore, observers could be forgiven for not getting their hopes up.

But what does this all mean? Well, apart from affecting the number of pints your converted euros will buy at the Stade de France, for small and medium-sized businesses in the UK who have operations in the European market, these swings in both the pound and the euro could have a direct and potentially harmful effect on their profits. As the Brexit clock ticks into the red, British businesses would be prudent to monitor the two currencies’ performances and consider how they can mitigate against any further volatility.

How UK businesses can protect themselves from currency volatility

Whilst the relationship between the pound and the euro might seem perilous, there are ways for UK businesses to traverse this tricky currency landscape. Employing a few simple foreign exchange tools could be a good place to start:

  1. Buy now, transfer later

One way to protect your business from any foreign exchange risk when managing payments from customers or suppliers is to use a technique known in the FX world as hedging. Speaking to a specialist payments provider can help you get a forward contract in place, allowing you to book transfers between two days and twelve months from now at today’s rate, protecting against future movements in the exchange rate.

Hedging a portion of your overseas earnings in this way will reduce the risk of volatile exchange rates and could make a real difference to how your business handles ongoing currency instability.

  1. Set your targets and save time

Another technique could be to use limit orders, which allow you to set a target exchange rate, at which your money will be transferred. This means that if your target rate is reached overnight or while you’re busy, your transfer can be completed while the rates are at their best.

A limit order allows you to get the best prices without having to constantly monitor the market, saving you time and energy and making sure your money management is in safe hands no matter how bumpy the market gets.

  1. Pay and get paid locally

A global currency account can help UK businesses sidestep some of the current uncertainty in the market. An account would let you pay your suppliers, invoice customers and even pay taxes in euros rather than pounds. This will help to simplify your cash flow, giving you more control over when you want to bring your revenues home, and leverage the fluctuation of exchange rates to your advantage.

With the potential increases in red tape that could be triggered by Brexit, being able to manage your money in one currency could make your international payments much easier.

Whilst the Six Nations will have a clear winner, the contest between the pound and the euro looks set to continue. It is still uncertain whether there will be a deal, no-deal or even a delay to Brexit, any of which will have a monumental effect on the two currencies. With so much uncertainty around Brexit and only around a month until the deadline, small and medium-sized businesses should think now about how they can minimise the impact of any drastic currency movements as they continue to trade with Europe.

Jake Trask is FX Research Director at international payments company, OFX, where he works with hundreds of British businesses on their currency exposure. He is also a keen rugby fan!

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