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Why is the pound falling and how does it affect me in the UK?

What exactly does it mean for you? (Picture: Getty)

Economic and financial news has been dominating much of the national conversation of late, with the British pound sterling struggling on the international currency markets in a way it hasn’t in quite some time.

Fears of a no-deal Brexit saw the pound facing tough times in 2019, but the current situation has seen the value of the pound (versus the dollar) sink below even March 2020 – as the first Covid-19 lockdowns began to bite.

But what exactly is going on, and what does the falling pound mean for your finances?

Here is everything you need to know.

What is happening to the pound?

When economists, politicians, or bankers talk about a ‘dropping pound’ or a ‘weak pound’, they are referring to the value of the GBP (British pound sterling) on the Foreign Exchange Market (sometimes referred to as the Forex or Currency Market).

The British pound reached record lows against the US dollar recently. (Picture: Getty)

The market determines foreign exchange rates for every currency and sees currencies bought, sold, and traded, with their value determined against other world currencies, like the dollar or the euro.

Around the world, investors buy and sell currencies to make a profit, meaning their value fluctuates.

Currently, the pound is performing poorly against other currencies – notably the US dollar, the world’s reserve currency.

Yesterday, the value of the pound (versus the dollar) when the market closed was very near even – with £1 worth $1.08. For context, at points in late 2007, the pound was worth more than two dollars.

To date, the pound has never been worth less than the dollar, though the gap has been closing for some time.

Why is the pound dropping?

The pound fell steeply in value following the newly-appointed Chancellor of the Exchequer’s ‘mini-budget’ which was unveiled on Friday (23 September).

The budget was designed to bring fiscal and tax policy more in line with the new Prime Minister Liz Truss’ priorities and included:

  • A cancellation of a planned rise in corporation tax.
  • A cut to the basic rate of income tax.
  • Cuts to stamp duty.

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Chancellor Kwasi Kwarteng described it by saying, ‘Economic growth isn’t some academic term with no connection to the real world. It means more jobs, higher pay and more money to fund public services, like schools and the NHS.’

‘This will not happen overnight but the tax cuts and reforms I’ve announced today – the biggest package in generations – send a clear signal that growth is our priority.’

However, critics of the mini-budget pointed to the potential for a higher budget deficit and more inflation, which is already running at record levels during the current cost-of-living crisis.

This has led to investors losing confidence in the pound, with the BBC reporting that Jane Foley of Rabobank has said: ‘They’re worried that some of these tax cuts that have been announced aren’t going to be fully funded.’

What does it mean for me?

Higher prices

If the pound’s value against foreign currencies is weak, importing goods from overseas becomes more expensive.

This cost can be passed on to the consumer, meaning that prices of imported goods can go up.

Energy bills are one of the things that are likely to increase, as the price of all of the gas that the UK uses is based on the dollar, even if the gas is produced in the UK.

Anyone purchasing fuel, energy, food, or other services recently won’t need reminding that costs are already high.

Prices will continue to climb (Picture: Mike Kemp/In Pictures via Getty Images)

Higher repayments for some mortgages

The Bank of England may choose to raise interest rates to combat this inflation. In essence, making the cost of borrowing more expensive to get people to borrow less, spend less, and save more.

This can mean that mortgage repayments can go up, as well as other borrowings, like car loans and credit cards, getting more expensive.

Some mortgage lenders have already withdrawn deals during the current period of instability.

About two million people in the UK on a tracker or variable rate mortgage could see their monthly costs going up even further as a result.

More expensive trips abroad

For holidaymakers going abroad, the weak pound means that your money wont stretch as far, as the exchange rate is no longer in our favour.

This means that dining out and your accommodation could set you back more, especially when visiting the US and other countries whose currencies the pound has dropped against.

However, it’s not all bad news. With the pound weaker, businesses that export out of the UK may see stronger sales, with customers abroad getting better value for money.

MORE : ‘Where have you been?’ Liz Truss finally emerges after mini-budget sparked pound turmoil

MORE : Your tank of petrol could cost £3 more due to plummeting pound

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