UK technology firms turn to forward contracts
The Bristol-based electronics assembler Aether Technologies recently increased its use of forward contracts in the foreign exchange market to manage the impact of exchange rate volatility. The depreciation of sterling throughout 2022 has put immense pressure on UK electronic importers. Currently, Aether Technologies imports key components like microchips and sensors from suppliers in Taiwan and the USA. "Because our manufacturing inputs are primarily priced in US dollars, exchange rate movements have an immediate and severe impact on our production costs and margins," explains the Operational Director. Forward contracts allow businesses to guarantee a specific exchange rate for future transactions, providing certainty over costs despite short-term market fluctuations. To mitigate rising import costs, 40% of surveyed UK technology supply chain managers are actively seeking to switch to domestic UK suppliers.
| Month | Price of £1 in US dollars ($ per £) |
|---|---|
| Jan 2022 | 1.35 |
| Feb 2022 | 1.34 |
| Mar 2022 | 1.32 |
| Apr 2022 | 1.28 |
| May 2022 | 1.24 |
| Jun 2022 | 1.21 |
| Jul 2022 | 1.19 |
| Aug 2022 | 1.16 |
| Sep 2022 | 1.11 |
| Oct 2022 | 1.12 |
| Nov 2022 | 1.16 |
| Dec 2022 | 1.20 |
| Jan 2023 | 1.22 |
| Feb 2023 | 1.21 |
| Mar 2023 | 1.23 |
| Apr 2023 | 1.24 |
| May 2023 | 1.25 |
Using the information provided in Extract A and Figure 1, examine the likely impact of the change in the sterling exchange rate on the UK economy.
