UK corporates are at a crossroads as the pound
strengthens. The latest research shows that businesses are divided on whether
they are benefiting or struggling. Rising costs and tighter credit conditions
are forcing firms to rethink how they manage their foreign exchange (FX)
exposures.
The Impact of a Strong Pound
According to the study by MillTechFX, 83% of UK
corporates reported that the stronger pound has affected their finances.
Interestingly, the effects are evenly split, with 50% seeing positive results
and the other half experiencing negative impacts.
As a result, hedging strategies have become a solution
for many firms. However, the rising cost of hedging is proving to be a challenge,
especially for smaller firms. According to the study, 70% of UK corporates mentioned
that FX hedging costs have gone up, with smaller businesses affected the most.
Besides the hedging expenses, businesses are dealing
with a challenging credit environment. MillTechFX’s research highlighted that
94% of respondents found it harder to access financing in 2024. The combination
of higher interest rates and increased fees from credit providers is adding to
the financial strain.
This credit crunch is especially tough on smaller
firms. For companies with between 50 and 99 employees, 87% reported facing
tougher lending criteria. Even for larger firms, nearly 60% indicated that
securing credit had become more difficult.
Despite the hurdles, many companies are sticking with
their hedging strategies, and some are even lengthening their hedges. The
research further showed that the average hedge length increased by 47% in
2024, reaching 5.55 months.
Global Instability
53% of companies plan to extend their hedge durations
due to fears surrounding global instability. Concerns about the upcoming US
election, in particular, are driving this move, with CFOs worried about
unpredictable market movements and counterparty risks.
UK corporates are also diversifying their strategies
by turning to FX options. The report found that 64% of finance leaders are now
using FX options more frequently. At the same time, technology is playing a key role in
reshaping FX management. All respondents in the MillTechFX report indicated
that they are exploring the potential of artificial intelligence (AI) and
automation in their FX operations.
Interestingly, 34% of UK corporates conduct financial
transactions by phone, while 32% use email. These legacy processes not only
slow down operations but also expose firms to human error.
UK corporates face challenges as they adapt to a stronger
pound, rising costs, and a more uncertain geopolitical landscape. However, the
rise of AI and automation enables businesses to streamline their FX operations
and manage their risks more efficiently.
This article was written by Jared Kirui at www.financemagnates.com.
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