By Koen VanpraetCEO EMEA at Moneycorp, a leading global payments and foreign exchange fintech that helps businesses navigate the complex global payments market.
With GDP data from the ONS estimating that the UK economy shrank 0.3% in August from July, a recession looks likely.
However, the threat of recession and weaker GDP does not necessarily spell the death knell for business. Managing currency exposure and minimizing risk will be critically important to ensuring business survival.
And now, with significant economic events – such as the ongoing war in Ukraine, the recent resignation of Liz Truss as Prime Minister and the further confirmation of Rishi Sunak as her successor – also adding further turbulence to the global environment. , companies will need to plan carefully to ensure the sustainability of their organizations.
Monetary trends and implications for businesses
So far this year, the pound has seen a significant degree of fluctuation, causing economic turbulence for the UK economy and businesses. Ongoing international tensions, rising fuel prices and the difficult political situation in the UK have all contributed to the market volatility seen in recent months.
More recently, we saw the pound hit an all-time low against the US dollar when a series of tax cuts and spending measures were announced in Chancellor Kwasi Kwarteng’s mini-budget in September. With the pound falling almost 5% to its lowest ever rate of $1.0327, confidence in the UK economy and currency declined across the board.
While the pound briefly rallied following Jeremy Hunt’s reversal of the Kwasi Kwarteng tax cuts, the resignation of British Prime Minister Liz Truss, subsequent government reshuffles and the possibility of a snap election are expected to throw even more volatility into currency markets, putting increased pressure on smaller businesses.
And with such high volatility comes a corresponding risk for companies trading in sterling. For importers and exporters in particular, any sudden change in exchange rates can see a profitable transaction suddenly lose value or, in extreme cases, become a very unprofitable transaction that actually results in losses. Additionally, when conducting transactions and payments, minimizing risk when transacting in multiple currencies is crucial to maintaining not only profitability, but also customer and stakeholder relationships.
Steps Companies Can Take to Mitigate FX Market Volatility
With such seemingly endless uncertainty in the market and extreme currency fluctuations becoming a daily occurrence, keeping risk within viable limits is now a constant challenge for SMEs.
In such an environment, planning ahead to minimize exposure and ensure the sustainability of your business is arguably more important than ever. Fortunately, there are a number of solutions businesses can use to mitigate and minimize currency risk while helping them keep tabs on market opportunities.
With no signs that the political situation in the UK will resolve anytime soon, there is undoubtedly more volatility in the pound ahead over the coming weeks and months, which means heightened risk. for SMEs. Foreign exchange products such as forward foreign exchange contracts and hedging services can benefit businesses seeking more certainty during this time.
With a forward exchange contract, for example, a company can fix the exchange rate for a trade or transaction at an agreed rate. By doing so, they can put themselves in a better position to manage their expenses or income, establishing a stronger foundation from which to deal with unpredictable market fluctuations and other external variables.
Many forex providers also offer services such as spot trading, options and hedging to help businesses further minimize losses and sustain trading relationships thereafter. Other tactics could include trading through additional or alternative markets where there is less volatility.
Whichever path you decide to take as a business, ensuring you have a reliable FX partner and a detailed plan in place should be an integral part of your strategy.
The benefit of using a bespoke FX solution provider
With a plethora of FX providers and new fintechs on the market all offering similar services, it can be difficult for a business to find the right partner who can meet their specific FX needs. Service and efficiency must be at the heart of any successful FX relationship.
When looking for the right FX partner, it is therefore important to consider two key elements: what your immediate trading needs are and what future events might require you to minimize your long-term FX risk.
A partner who can not only look ahead and help you anticipate market fluctuations, but also look historically at currency markets and understand your unique needs will be invaluable in today’s landscape. With many banks often adopting reactive approaches to foreign exchange, Moneycorp has built a unique position in proactively supporting its customers with their individual needs. In practice, this means that we tell our clients about potential market events before they happen – not after – and give them the tools and knowledge to act when it matters, and thus minimize losses.
In the end, it all comes down to being prepared for uncertainty. Understanding your options as a business and the foreign exchange services available to you are two essential steps to ensuring that you are as equipped as possible for whatever lies ahead. It’s about knowing what you can and being prepared for what you can’t.