With news that the UK could be heading for a hard Brexit: a complete removal from the single market and its benefits, Sterling remains under pressure but equally benefits from foreign investment and stronger exports.
But what next for the UK? European leaders have already voiced warnings which seem to limit the UK's options when it comes to negotiations. And whilst the cheaper Pound does appear to be cushioning the economy, how long until consumers bear the brunt of higher costs?
Perhaps problems further afield could provide extra comfort for Sterling. The US elections could present some opportunities and with the European elections next year, Brexit could well have created some political stirs. If you need to make a currency transfer in the foreseeable, we recommend you keep in regular contact with a broker here at currencies.co.uk. During these times of global uncertainty exchange rates could change frequently and without warning.
Friday October 8th was another reminder that markets can shift suddenly, to the detriment of many with an upcoming or ongoing foreign currency requirement using the Pound.
I woke up at 4am to have a similar feeling of déjà vu when checking my phone to seeing the Pound having fallen through the floor as to the day after the Leave vote in June. Whilst the main reason for the fall is attributed to wayward trading in Asian markets overnight, the heightened sensitivity in the marketplace following Theresa May’s announcement of an enactment of Article 50 by March was the kindling for the fire.
We now have a deadline to work with, and whilst it is still 6 months away, and from there a further two years until the Brexit itself, we are already seeing markets reacting heavily to the news. In a hypersensitive market a premium is put on being able to move quickly should any tempting opportunities emerge. I strongly recommend if you have an upcoming currency requirement you should detail this to your account manager here to ensure you remain a well-informed purchaser. The articles below detail what events to watch out for in the short to medium term.
Before the Referendum it used to be rare that events in the foreign currency markets would make the front page news, but it has since become a regular occurrence. It would have been hard for anyone to avoid the news of the flash crash earlier in the month.
No-one know exactly how this happened to the Pound, as the Bank of England are still investigating by back tracking the transactions which led to the mass sell-off of Pounds.
However, the prevailing theory was that an automatic trading order for a large volume of Sterling to sell was triggered accidentally, which then had other automatic orders following suit, resulting in an instantaneous and unexpected downward spiral.
This all happened in a matter of seconds, but ultimately the Pound did recover to a small extent throughout the day on that Friday. Since markets realised the drop was artificial, the net flow of capital back into the Pound whilst it was suddenly a bargain allowed its value to rise through increased demand.
So the silver lining for anyone purchasing a foreign currency is that the drop on Friday is not suggestive of further heavy falls in the short-term. In fact in the week which has followed the vote, GBP/EUR as one example rose by over 3 cents since the crash.
The main narrative on the Pound is still Theresa May’s announcement deadline for enacting Article 50 by March 2017, which is what created the charged atmosphere necessary for the flash crash.
What does this mean for the Pound moving forward? Frankly, the anticipation on where the negotiations will take the UK economy will continue to create the uncertainty which keeps the Pound’s value in check.
However, there is still room for recovery. Economic performance data for the UK is still showing fantastic results in key areas. Where some features have been dampened by Brexit, others are excelling. For example the cheap Pound is making our manufacturing sector flourish after years of disappointing results. The key feature which will keep investors in the Pound happy is that the engine room of the UK economy, the financial markets, are ticking over well, and the UK stock market hit record highs only last week.
As such it seems that for anyone buying a foreign currency using Sterling, there is still potential for opportunities to present themselves. However, in this hypersensitive market, these can disappear quite quickly. I recommend detailing any requirements to your account manager here to ensure you remain a well-informed purchaser and avoid the situation where you are ‘last to the party’.
Many of my current customers have been asking why all the current problems in the Eurozone are not stacking up on the value of the Euro. These sentiments are understandable, as the list is long.
Italy is close to needing a bailout, Greece is nearing another debt repayment and is struggling, and even Germany is having its own problems with its largest financial institution – Deutsche Bank – likely to be requiring emergency assistance in the near future.
Yet the Euro appears to be continuing to hold its value. This, however, is not necessarily true. There is a reason why GBP/EUR is only at a 3 year low whilst GBP/USD is at a 31 year low. The Euro is also down against the likes of the Australian Dollar, and is close to some of the best levels in years for anyone looking to purchase it using US Dollars.
The real question I believe that most are asking is why are we not seeing the same Euro weakness which caused the fantastic buying levels seen last year when Greece was on its knees?
The principle reason is precedent. The Eurozone have committed time and again to spending their way out of their problems. We already have a pre-commitment for an Italian bailout and from the German government to assist Deutsche with a bailout if need be. Markets simply want assurance that their investments are protected and there won’t be a change to the status quo. They’ve been given the assurance they need, so whilst the Euro is weaker, it hasn’t collapsed.
Much of market sentiment surrounding GBP/EUR will be driven by events closer to home for a while it seems. Given that the value of the Pound is currently tied to an evolving political situation, a premium will continue to be put on being able to move quickly if need be. A popular option at the moment for Euro buyers is a forward contract, which allows buyers to lock in buying rates for up to 18 months to ensure you are not caught off guard with a purchase later in the year.
Here we are, just a few weeks away from the most watched election in history attached to a currency who’s rarely enjoyed higher demand – how will this mixture gel with US Dollar buying rates in the run-up to November 7th? Traditionally, in the run up to an election, the uncertainty of what the outcome may be tends to diminish demand for the currency in question. The actors who move the average exchange rates which our customers see when they look online at GBP/USD are the traders at high street institutions who move the hundreds of millions in capital daily.
In normal times, they will normally withdraw their interest in the US Dollar, as the potential for its value to fall off the cliff in the instance of a controversial candidate coming to power, or a contested result, encourages such caution.
In this situation, much will depend on how close the polls are in the run up to the vote. With Brexit as an example, the Pound was steadily moving up in value throughout the day and evening before the results on the 24th because the polls were (wrongly) reflecting a clear victory for Remain.
Currently Hillary Clinton is clearly ahead against Trump, and she seems to be the clear market favourite to continue on from President Obama’s current policies and not ruffle the feathers of the current long-term plans in place for many businesses. But with still a few weeks to go and with an election currently dogged by scandal at every turn, another Presidential debate lined up for Wednesday 19th, and with an understandable distrust for the polls following the Brexit vote and last year’s General election in the UK, there is still all to play for.
Given the recent flash crash pushing US Dollar value to unprecedented highs, arguably unjustifiably so, and with the election unlikely to provide a boost to the Dollar’s value with only really downside risk visible, USD sellers may be wise to move sooner rather than later, and then enjoy the drama of the election without the potential for it to affect your transfer.
The Aussie has had one of the clearer runs against the Pound than other currencies. The main reasons behind this rally are the uncertainty surrounding the Leave vote, as well as the strangely beneficial effects the Australian Dollar enjoys from a heightened atmosphere of risk in the global marketplace. Despite interest rates on the Australian Dollar being at record lows, it is still 6 times higher than that of the UK and the Pound and three times higher than the US Dollar. However, it is not normally a clear choice for investors as it is deemed a ‘riskier currency’.
Due to the size of the mining industry in Australia, the value of the Dollar is largely linked to the commodities market, which can change and shift heavily on a daily basis. So whilst interest rates are higher, the value of the capital you hold can change drastically in a 24 hour period, which decreases demand for the Aussie.
However, we are not in normal times. Traditionally more stable currencies such as the British Pound are now anything but. In this period of heightened global risk throughout the marketplace, the Australian Dollar no longer seems so daunting by comparison, and demand for it is through the roof as a result.
Before the flash crash, however, GBP/AUD seemed to have stabilised. Particularly since the Australian Dollar is so strong now the prospect for it as an investment is an expensive one – here the market is behaving somewhat logically in balancing itself out.
The commodities market is on the rise due to a global focus to invest in infrastructure to keep economies ticking over in this time of slow growth, and is also being helped by resurgence in oil prices – so the Australian Dollar should hold its value in the near term. It seems that here the main variable is still developing political events in the UK.
If you would like to discuss any upcoming requirements, whether buying or selling Australian Dollars – you can contact your account manager here to discuss the options open to you to safeguard your transfer in this volatile marketplace and ensure opportunities are seized immediately, even for planned transfers in the future. Alternatively. you may wish to call us regarding a Euro or US Dollar transfer. Our team of knowledgeable brokers are available Monday to Friday to take your call on 01494 725 353.
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