The Effects of Uncertainty on the GBP/USD Exchange Rates - Paper Example

Introduction

There is a challenge in predicting the trends in the exchange rates. The difficulty in forecasting the exchange rates implies a problem in analyzing and predicting the effects of the uncertainty in the USD/GBP exchange rates to companies and businesses. There are, however, several effects of the changes in the exchange rate to a company that engages in imports or exports. This essay intends to discuss the impact of uncertainty of the exchange rates on the US dollar and the Sterling pound on business. The write-up attempts to precisely describe the influence of forex on exports, imports and the Foreign Investment Trade.

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The managers who fear risk reduce the prices of risky assets which are a flight to quality. Uncertainty is likely to make agents discard hazardous properties and stick to incontinent and safe states during low average liquidity. The exchange rate Index (ERI) measures the strength of the pound or US dollar against the other currencies from other countries. The ERI is essential in determining the level of competence of the traded products (Beckmann & Czudaj, 2017). This strength is an implication of the movement of trade in the goods and services. The changes in the exchange rate affect the competition in the domestic markets from imports from other countries. The variations also influence the rivalry between the exports of the UK and the US goods and services in the USA.

Moreover, the level of competitiveness of the UK and US exports to other country consumers may also vary. The GBP has shown constant fluctuations since 2016. These high variation rates, therefore, affect the market which may drive the consumers to safety measures.

The decrease in the value of the GBP in comparison to other currencies implies a reduction in the purchasing power in foreign money. The foreign investors who rely on the pound for transactions are likely to experience a fall in their buying ability. There are press surveys that the fall in the value due to uncertainty results in the increase of prices for prestigious goods such as Apple and Tesco. These increases are a response to the changes in the monetary values. The uncertainty is also likely to influence the Consumer Price Index (CPI) and the Producer Price Index (PPI) which eventually determines the prices of goods and services in the market by a specific company (Wilkinson, 2005). The import-intensive goods led to a higher rate of inflation during the fall in the value of the pound.

The uncertainty in the GBP and the USD exchange rates has a likelihood of increasing the importation costs by a company operating in the UK market. The inflow of goods and services that are of high costs may lead to high production costs. Depending on the stability of the currencies in the international market, the company may realize a rise in the exports and a likelihood of a fall in the revenue. The price of the exports from the UK may also reduce and as such, making the products highly cost competitive. An increase in the exports may result n the inflow of more money (Bekaert, Hoerova, & Duca, 2013). The export of the goods, however, depends on the economic status of the consuming countries and as such their purchasing powers. A drop in the value of the pound relative to other countries that constitute the foreign market may promote the buying capacity of the consumers. The improvement in the purchasing power implies a rise in exports. A drop in the value of the pound and the corresponding increase in the exports may also be a factor of the demand for goods such as the luxurious items.

Foreign direct investments may moreover experience changes due to the variations in the monetary values. A company in the UK or US that intends to invest in the international market is likely to experience fluctuations in business operations due to the uncertainty in the pound or dollar exchange rates. A company that also invests in the UK or US as a foreign market may also experience the effects of the variations in the value of the monetary exchange.

Conclusion

In conclusion, a company that intends to export goods and services to the foreign market needs observe and monitor the variations in the foreign exchange. Although there are difficulties in predicting the influence of the exchange price in the market, there are some elements that can be easy to determine the corresponding changes with the uncertainty in the exchange values of the USD and the GBP. There are also situations that indicate minimal influence of the uncertainty in the USD/GBP on the exchange rates. The company has to adequately analyze the effects of the risk on export, imports and foreign trade investments. These three elements would enable the firm to strategically position itself in the market about the purchase of inputs and the selling of its goods and services to the international and domestic consumers.

References

Beckmann, J., & Czudaj, R. (2017). Exchange rate expectations and economic policy uncertainty. European Journal of Political Economy, 47, 148-162.

Bekaert, G., Hoerova, M., & Duca, M. L. (2013). Risk, uncertainty and monetary policy. Journal of Monetary Economics, 60(7), 771-788.

Wilkinson, N. (2005). Managerial economics: a problem-solving approach. Cambridge University Press