Everything you need to know about the pound's worst slump in 32 years

Everything you need to know about the pound's worst slump in 32 years

The pound has lost a fifth of its value since the EU referendum and is currently at levels that haven’t been seen since 1985.

But what does a weak pound actually mean and why does it matter? Here’s a run-down on what’s been going on and what might happen next.

What's the pound actually worth?

A graph showing how the pound has fallen in the months since the EU referendum

Today sterling dropped to its lowest point for three months – and it’s actually worse than that sounds. Back in October there was a flash crash, when the value of the pound momentarily plummeted thanks to a computer error. This was nearly as bad as that. So effectively, it’s at its lowest point since 1985.

The pound dropped to below $1.20, so if you'd changed £100 into spending money for a holiday in the US you'd have got just under $120. Back in 2007, the same amount could have got you $200.

On the Asian markets, the pound dropped to a two-year low against the euro to €1.13.

Why is it so low?

Donald Trump
President-elect Trump’s inauguration is on Friday and is likely to influence markets (Paco Anselmi/PA)

Buyers hate uncertainty, and the Brexit negotiations combined with the Trump inauguration are making everybody very jumpy.

The markets are also suggestible. The latest drop was likely due to British newspapers on Sunday widely reporting that Theresa May was going to declare this week that the UK was heading for a “hard Brexit”.

She's expected to announce her tough stance on negotiations in a speech on Tuesday, before eventually triggering Article 50 in March.

Also, Chancellor Philip Hammond just told a German newspaper that ministers might slash corporation tax rates if Britain was left out of the single market. He also said the Government would do “whatever we have to” to keep British companies competitive.

What does this all mean?

A graph showing how the FTSE and pound have fared since the EU referendum

When the pound goes down, the FTSE goes up, which is good for the companies listed. Many earn their revenue abroad, so their value increases. Their shares also become cheaper for overseas buyers.

The blue chip index, which monitors the performance of the best-performing companies, rose 13.80 points, and shares in Burberry and Marks and Spencer were amongst the top five FTSE winners.

A weak pound can be a boost to exports for British firms, and increase domestic manufacturing in the long run as importing expensive foreign goods becomes less attractive. It can also make holidaying abroad more expensive.

What will Theresa May say on Tuesday?

Theresa May will speak at Lancaster House in London(Hannah McKay/PA)
Theresa May will speak at Lancaster House in London on Tuesday (Hannah McKay/PA)

We’ve heard politicians talk about a hard, soft, and a red, white and blue Brexit, but the markets are mostly concerned about the possibility of the UK leaving Europe’s single market and customs union.

The European customs union is a trade agreement between the 28 EU member states (and weirdly, Monaco), where they agree not to impose import taxes on each other, and all set the same tariffs on imports from outside the union.

The single market is essentially the free movement of goods, services, wealth and, most controversially, people, between member states.

May is expected to hint towards leaving both on Tuesday, although Downing Street would not confirm this. What we can be sure of is that the pound’s value will react to whatever she says pretty quickly, which could mean another dive.