The pound fell sharply on the foreign exchange markets last week, dropping to a seven-year low below $1.40 against the US dollar and below €1.27 against the euro.
While Boris Johnson’s decision to join the EU “out” campaign triggered the latest fall, the pound has been in decline since reaching close to $1.60 and €1.45 around the middle of last year.
The changing interest rate outlook has compounded the fall, with market expectations about the next UK rate rise kicked into the long grass in recent weeks. Bank of England governor Mark Carney did little to suggest otherwise when he appeared in front of MPs last week.
To be clear, the pound’s volatility doesn’t necessarily mean the market wants the UK to vote in or out; rather it reflects the heightened uncertainty that the run-up to the referendum creates, and what will happen afterwards too.
All this is affecting the pound at a time when the UK’s current account deficit – the amount of money the UK has to attract from abroad to pay for its net overseas purchases – is close to a record high. Given the shift in interest rate expectations, mixed growth signals and a heightened referendum risk, for overseas investors the relative attraction of holding sterling assets could wane.
These headwinds suggest the pound may be vulnerable to further, potentially significant, falls. While a weaker pound would be good news for exporters, the heightened volatility underlines the case for Scottish importers and exporters to monitor their exposure to currency risk particularly carefully over the coming months.
In the short term this may actually play into the hands of two of Scotland’s strongest sectors: food and drink and tourism.
With the pound weakened by the ongoing uncertainty, Scottish food and drink producers importing raw ingredients may see an initial negative impact, however those looking to win new customers overseas will find their prices are more competitive. The industry already employs more than 45,000 people and generates sales of almost £11 billion a year, and this currency shift could help support its stated aim of achieving revenues of £16.5bn by 2017.
The weak pound will also make visiting Scotland even better value for overseas visitors, so we may expect to be seeing even more European and American tourists spending even more cash in our high streets.
In the meantime, all eyes will be intently watching the polls for clues as to which way the UK is likely to vote.
• Gordon Rate is head of Scotland, SME and corporate financial markets at Bank of Scotland