On Monday 9 July, Prime Minister Theresa May faced another member of her cabinet resigning – this time it was Boris Johnson, the former Foreign Secretary. Within minutes of his resignation, the pound plunged to around 1.3270 against the dollar, which is a fall of 0.3% in comparison with its opening price that morning. The pound also fell sharply against the Euro from 1.130 to 1.127. As the day went on, and the Prime Minister faced fresh leadership challenges, the pound continued to fall by 0.8% to 1.3270 against the dollar.
The latest political dramas began when key members of the cabinet could not agree on the Prime Minister’s Brexit plan. As Theresa May now faces a leadership challenge, this poses a threat to the financial markets. By the end of the week, controversial comments made by President Trump during his UK visit about the PM’s EU trade deal, saw the pound plunge yet again to 1.3131 against the dollar. Investors are now wary due to the political uncertainty, and there has been some suggestion that the Bank of England will raise interest rates next month.
So, how do you prepare for market volatility against the impact of political influences? In this article, we look at the current economic climate and ways you can protect your investments and your business.
Will the pound continue to fall?
Since the referendum back in 2016, we have seen a series of events affecting the markets. As soon as any confidence is lost in any ruling government, this nearly always has a knock- on effect on the financial markets. Investors become cautious due to political uncertainty. Despite the dramatic drop in the pound, at this stage, many economists are not treating this as a sign of a major downward trend. However, it is always better to be prepared for any market volatility when it comes to potential political changes in government leadership.
What about Brexit?
Any deal made on Brexit with the EU will have ramifications for the markets. Most economists agree that the pound will cope with changes in government, but the way Brexit will be delivered will have serious implications for investors. The reasons behind both Boris Johnson and the former minister in charge of Brexit negotiations, David Davis, resigning is due the fact they did not agree with the PM’s proposed post-Brexit relationship with the EU. With the cabinet still in disarray, it is very unclear what type of relationship is in store between the UK and EU post-Brexit.
What can I do to prepare for Brexit?
If you’re an investor, then you need to apply a sensible risk management approach to your current investment strategy. Due to political uncertainty, it is worth diversifying your portfolio and ensuring you have secure savings to off-set any potential future losses. Sometimes, when the markets are in a state of flux, this can be a good time to invest. However, always proceed with caution and check your investment strategy by speaking to a professional.
If you’re a business owner, you need to consider how you may be affected by changes in customs and tariffs. At this stage, there is still much debate about whether the UK will be leaving the EU Customs Union. If you’re an importer/exporter with the EU, any changes to tariffs and customs duties are likely to have an impact on your business. There are worries that this may push up the cost of goods. If you rely on certain suppliers, it is worth checking to see how they might be affected too. However, on the other hand, being freed up from the EU to trade internationally could be advantageous to some exporters/importers, as they could have access to new markets. New international trade deals may prove beneficial to some businesses.
Financial planning for uncertainty
To conclude – whether you’re an investor or a business owner, it’s a wise move to prepare yourself for potential market volatility due to the current political and economic uncertainty around Brexit. Always create a sound financial buffer to protect your investments and your business. As we seem no closer to a Brexit deal, and the cracks are now surfacing within the UK government, there is very little certainty as to what the future holds and how we will all be affected. Our advice: the more financial planning you undertake now, the more prepared you will be, and this will help to ensure you are resilient in the face of any market changes.