A report by the BBC reveals that the value of sterling hit its lowest level in over a year on 9 January 2025.
Such headlines may not feel immediately relevant to how you manage your wealth day-to-day.
When you review your personal finances, you might look at factors such as how much your monthly mortgage repayments are, the interest your savings are generating, and the general cost of living.
Perhaps you only think about the value of the British pound when exchanging currency before a holiday.
Yet, a weak pound could affect your wealth in several ways, from how much you pay to fill up your car to the value of your pension.
Keep reading to learn more about the falling pound and discover three important ways it could affect your finances.
The value of the British pound fell sharply in January 2025
You may have found it hard to avoid headlines about the struggling UK economy and weak British pound in January.
Figures published by Exchange-Rates.org, show that the pound fluctuated between a low of 1.2117 USD on 17 January and a high of 1.2514 USD on 1 January 2025. According to Yahoo Finance, this makes sterling the poorest performing currency in the G10 this year.
Concerns about the strength of the UK economy, rising government borrowing costs, and President Trump’s tariff threats, may all have contributed to the falling pound.
Yet, there were some glimmers of hope. For example, the Financial Post reported that the pound rallied against the US dollar on 3 February in response to the president granting the UK a reprieve from his planned trade tariffs.
However, short-term improvements don’t necessarily indicate a long-term trend and the outlook for the British pound in 2025 remains uncertain. For example, the UK may be off the tariff hook directly, but the UK economy (and so the value of the pound) could be affected by supply chain issues abroad.
So, it’s important to understand how a weak pound could affect your finances to help you identify strategies for mitigating these potential consequences.
3 important ways the falling pound could affect your finances
A drop in the value of sterling could affect your wealth in several ways.
1. The price of goods and services may increase
When the pound is weak against other currencies, such as the US dollar, it costs UK companies more to import products such as food and building supplies, from abroad.
So, you may find that you’re paying more for goods and services as some businesses pass this cost on to their customers.
As the cost of living crisis continues, any further increase in the price of everyday essentials could put an unwelcome level of financial pressure on your household.
Of course, not all businesses will increase their prices in line with rising costs. Additionally, some larger businesses, such as the leading supermarkets, may not immediately face a price hike if they have bought stock in advance.
Yet, it’s likely that due to steep energy costs and higher-than-average inflation, few companies will be able to absorb any extra expenses that arise as the result of a weak pound.
As such, you may need to review and amend your budget to accommodate rising costs.
2. You could face higher repayments if you have a tracker- or variable-rate mortgage
A falling pound typically pushes inflation higher as the UK imports more than it exports, leading to a rise in the cost of living (as discussed above).
If the Bank of England (BoE) counters rising inflation by increasing interest rates, this could affect your monthly mortgage repayments – depending on the type of mortgage you have.
Tracker mortgages directly follow the BoE base rate and variable mortgages are usually set by the lender, who usually sets their interest rates according to the base rate. So, higher interest rates could mean that your monthly mortgage costs go up. If you have a fixed rate, your payments will remain the same until the end of the loan term.
According to This is Money, tracker mortgages have become more popular in recent years. The number of households with this type of mortgage rose from 86,212 in the first quarter of 2021, to 160,787 in the first three months of 2024.
This may be in part due to higher interest rates – some homeowners may have opted for a tracker or variable rate deal when their fixed term ended in the hopes that the base rate would be cut in the near future.
While this strategy may allow you to benefit from any future reductions in interest rates, you could also see your monthly payments rise if the BoE increases interest rates.
Fortunately, as reported by the Guardian, the BoE cut the base rate from 4.75% to 4.5% on 6 February, despite the weak pound and fears of rising inflation.
While this is likely to be welcome news if you have a mortgage that tracks the base rate, it may be prudent to keep your eye on future changes to help you make informed decisions about your mortgage.
3. Business owners and investors may benefit from a weak pound
A falling pound isn’t necessarily all doom and gloom.
If you own a UK-based company that exports goods, your products and services are likely to become more attractive to overseas customers, thanks to the favourable exchange rate.
Likewise, if you invest in such businesses, a falling pound may boost the value of your portfolio.
What’s more, any gains or income you make from your investments may be more valuable when translated from dollars into pounds. In fact, according to Morningstar, many of the FTSE 100 companies derive a significant amount of their revenues and profits in dollars.
So, if you rely on dividends as a source of income, you may benefit from a weaker pound.
It’s also worth reviewing your pension. If you have a private pension that is heavily invested in UK assets, your savings may be affected by a falling pound.
A financial planner can help you check and adjust your pensions to ensure that you stay on track to achieve the retirement you desire.
Get in touch
If you’re concerned about how the falling pound might affect your wealth, we can help. Reviewing and adjusting your financial plan could allow you to continue progressing towards your goals, whatever the economic outlook.
To find out more, please get in touch. Email hello@sovereign-ifa.co.uk or call us on 01454 416653.
Approved by Best Practice IFA Group Ltd on 11/02/2025
Please note
This article is for general information only and does not constitute advice. The information is aimed at retail clients only.
All information is correct at the time of writing and is subject to change in the future.
Please do not act based on anything you might read in this article. All contents are based on our understanding of HMRC legislation, which is subject to change.
A pension is a long-term investment not normally accessible until 55 (57 from April 2028). The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Past performance is not a reliable indicator of future performance.
The tax implications of pension withdrawals will be based on your individual circumstances. Thresholds, percentage rates, and tax legislation may change in subsequent Finance Acts.
The value of your investments (and any income from them) can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.
Investments should be considered over the longer term and should fit in with your overall attitude to risk and financial circumstances.
