Sterling still highly vulnerable, despite recent gains

Despite rising steeply over the past few days, the pound is still incredibly vulnerable, however it’s crucial that families and investors must not become complacent in terms of substantial declines.

Sterling has hit a 12-week high against the euro and reached new highs against the U.S. dollar. Indeed, the pound has enjoyed an impressive run recently as risk appetite improves amongst investors, partly due to stronger than forecast data.

That said, it’s vital to closely monitor the pound’s trajectory as investors may be caught off guard should their investment portfolio not be sufficiently diversified.

Therefore, as it stands, complacency must be avoided amid real, heightening concerns that a major sell-off could be looming.

Indeed, the threat of tax hikes being announced in the November Budget and time-sensitive Brexit trade negotiations at a standstill are key reasons why investors should remain cautious on the pound.

At the start of the coronavirus pandemic, UK government debt was higher than many other G10 nations. This has grown substantially due to the necessary fiscal support to safeguard the economy during the lockdown.

As such, there are very real concerns on the sustainability of the pound’s outperformance over the long-term so far this quarter.

The significant decline in the pound’s value over the past few years has led to a reduction in purchasing power and falling UK living standards.

A weaker pound means more expensive imports, with elevated prices being passed on to consumers.

Although many claim that a fall in sterling is good for exports, it must be remembered that around half of Britain’s exports depend on imported components. As the pound drops in value, these will become more expensive.

In addition, a low pound is bad news for UK holidaymakers and travellers overseas, as well as expats who receive UK pensions or income from Britain.

Furthermore, the financial services sector – one of the most important sectors in the UK – will suffer from another blow to the pound as it is built on foreign investment that places its faith in a strong pound.

Indeed, the pound is highly vulnerable with major issues on the horizon that could impact its value.

Consequently, these need to be closely monitored to mitigate risks and make the most of the opportunities when they come about.

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