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The changing face of the pound

Millennials may never have known the £1 as anything other than a coin, but it caused quite a stir when it replaced the old green bank note back in April 1983.

The decision was taken to replace the note with a coin following a general decline in purchasing power in the early 80s, which meant that smaller denominations were in constant use.

The notes only lasted an average of nine months, whereas coins have a lifespan of 40 years or more, so it made sense for the Bank of England to introduce a much longer-lasting alternative.1

The coin, comprised of 70% copper, 24.5% zinc and 5.5% nickel, had a distinct gold colour and was 2.80mm thick to help distinguish it from other coins in circulation.

This version of the pound was only to last for 30 years, however, and was replaced in March 2017 by a new 12-sided £1 coin, which is much more difficult to fake than the round £1 coin. According to some reports, around one in 30 of the old round £1 coins was a counterfeit.2

Factors affecting the value of the pound

Of course, the pound doesn’t just change in appearance over time. Its value also fluctuates against other currencies, with several different factors driving changes, including economic and political events, interest rate movements and inflation.

Higher interest rates, for example, tend to attract foreign buyers seeking higher returns, which provides sterling with a boost. Conversely, when interest rates fall, the pound weakens, making imports more expensive which in turn bumps up the cost of living.

Sterling has experienced something of a rollercoaster ride since the vote for Brexit some three years ago, with ongoing political uncertainty continuing to exert pressure.

In February the pound reached a 21-month high against the euro after the Prime Minister Theresa May agreed to give MPs a vote on whether to extend Article 50 rather than leave with no deal,3 but then fell back again in March following the announcement that there would be a Brexit delay.4

Greater clarity over exactly how and when Brexit will take place could potentially bring a period of greater stability for the pound, but there are no guarantees.

How currency movements affect UK investments

When the pound rises or falls in value, this can have a big impact on UK investments. Often sterling weakness benefits UK investors, as many of the multinational companies listed on the FTSE 100 index of Britain’s biggest companies earn much of their revenues abroad. This means that when the value of the pound falls, foreign profits are boosted when converted back into sterling, and vice versa.

However, a weaker pound is often less positive for smaller UK companies who may not operate overseas, as it reduces the buying power of their customers here.

It’s impossible to know which direction sterling will move in next, but given current political and economic uncertainty, it arguably makes sense to prepare for ongoing volatility.

References

 

1 https://www.royalmint.com/discover/uk-coins/coin-design-and-specifications/one-pound-coin/

2 The Daily Telegraph, All change, round pound deadline is midnight tonight, October 2017

3 The Guardian, Pound hits 21-month high as Brexit delay looms, February 2019

4 Reuters, Likely Brexit delay ushers more uncertainty for the pound, March 2019

 

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