News that the Sterling Index rose to 2008-highs last week should have been a concern for UK exporters – a strong sterling means that UK exports cost more overseas.
Buoyed by unemployment dipping to 6.9%, real wage growth and speculation that the Bank of England (BoE) may raise interest rates in 2015, sterling consolidated its gains. However, news that the inflation rate fell to 1.6% in March, lower than a BoE target of 2%, as well as rising levels of household debt – held sterling back from strengthening significantly.
"Inflation levels are too low, and household debt is too high," says Carl Hasty, Director of international money transfer specialist Smart Currency Business. "The only silver lining in this scenario is that sterling hasn't grown strong enough to impede UK export competitiveness.
"UK exporters will potentially face the dilemma of having to cut prices, which would squeeze their profits on the bottom line, or focus on domestic markets instead.
"Given sterling's current position, UK exporters can still enjoy relative export competitiveness on the whole. However, currency markets have the potential to fluctuate greatly. Sterling may be on a strong streak, but it could also potentially weaken, due to events either within the UK or overseas. UK exporters need to have foreign exchange strategies in place to minimise risk, regardless of what happens to sterling strength."