For over 20 years, the British pound (GBP) has been worth more than many other currencies, including the Yen, Euro, and Dollar. This strength, while not as forceful since the Brexit referendum and its manifold economic effects, is still holding, and benefited greatly during the pandemic. But why is the pound strong? And how does this strength impact international business?

Why is the British pound stronger?

If a currency is worth more than another is greater than a 1:1 ratio, it is stronger. This is due to a range of factors, though typically, it centres around stability.

If the currency is based in a country that is politically and economically more stable than the currency (and country) it is being compared against, it is typically stronger, especially in times of economic turmoil.

Britain has rock-solid institutions, global economic clout, and is a stable democracy, so is usually seen as a safe haven, which is what we can see happened during the pandemic. This is a point repeated over and over by the best economics books.

However, because it is interconnected with the global economy and thus isn’t immune to economic shocks, and is now exiting the European Union (which economists think will affect its economy negatively), its strength can drop. Looking at the graphs of currency value linked to above, we can see these effects during The Great Recession, and in 2016 after the Brexit vote.

As any forex trading book will highlight; it’s important to note that currency value is relative too. A sunnier economic outlook in the US, European Union, or Japan will put pressure on the value of the British pound if it is not having such economic luck. Investors will sell their pounds and buy a safe haven currency with a more positive outlook, reducing the value of the pound relative to the currency being purchased.

What does a strong pound for international businesses?

If you own an international business, currency strength is a key concern as it can affect the way your business operates and your performance. If you choose to base your company in the UK, your business account and any transactions you wish to perform will be carried out in GBP, and if you do business with customers in the UK, you will be exposed to changes in the pound’s strength. What does this mean materially, though?

Firstly, when a currency is stronger, it is cheaper to import goods from other countries. If your business is based in the UK, that means you can buy raw materials for a cheaper rate and cut your costs in kind.

However, it does make the goods you sell more expensive overseas, so if your business is involved in exporting products or services, you may be seen as less competitive on the global stage.

A strong pound also means less expensive travel, as you will receive more international currency upon conversion. Businesses that rely heavily on business travel may find a benefit here too.

And if your business invests money or trades forex in the currency markets, the pound can be a good bet during times of turmoil, however it would be advantageous to keep a keen eye on Brexit developments going forward.