How does the forex market impact UK business?

The forex market is the single largest financial market in the world, with spot transactions alone accounting for an estimated $2 trillion in daily trading volumes.

At its core, however, forex trading takes place on the foreign exchange, which is where international currencies and swapped and exchanged at a real-time.

As a result, the forex market and its individual transactions can have a direct impact on businesses, and the economy as a whole. We’ll explore this further below, while asking what entrepreneurs can learn from foreign currency trades.

The Impact of Forex on Business Transactions

In practical terms, forex market price movements and changes in the international exchange rate can directly impact supplier payments. 

This is a common issue for international businesses, who often have to pay suppliers in their national currency and may need to exchange a fixed cash value at the real-time rate. 

The exchange can rise and fall sharply during daily trading sessions, creating a scenario when supplier payments can frequently fluctuate in terms of their cumulative value. Of course, the risk is slightly lower for major currency pairings such as the GBP/USD and EUR/GBP, which are relatively stable and tend to trade within a narrow range.

It’s also important to note that balance sheets need to be accurately aligned at all times, in order to provide stakeholders, senior leadership teams and investors with a clear financial picture. 

This will require the statement of all assets and liabilities at the real-time exchange rate, while stockholders’ equity accounts are translated at an historical average rate.

Forex and the Wider Economy

Even on a fundamental level, foreign exchange price movements have a direct impact on the cost of international trade, with investors often using a UK forex broker to implement trades based on these fluctuations.

After all, exporting goods overseas means that the cost of producing and selling goods involves at least two different currencies (depending on your target international markets), so your business will see its profit and loss margins impacted by forex price fluctuations.

In general terms, there’s also a clear relationship between the forex market and the wider macroeconomic climate, with the former offering entrepreneurs a fascinating insight into how national economies are performing.

In the case of interest rates, for example, a higher base rate is indicative of a strong national currency and robust economic performance. Higher interest rates also attract foreign investment, creating increased demand for a home nation’s currency and improving investor sentiment across the board.

Remember, it’s widely thought that a strong economy is supported by a robust and high-value currency, so entrepreneurs can use this as a gauge to measure sentiment and make viable decisions regarding strategy and international fund transfers.