By Lauren Buckner
It feels as though we blinked and 2023 and is three quarters over and retailers and manufacturers are starting to turn their attentions toward Christmas – but has it been such a fast year for the Pound? Looking back over the year so far and further, it has in fact been a rather stable and positive year for Sterling and despite the headlines and squeeze on our pennies closer to home, FX rates have offered some rare stability and good news!
The Pound is currently trading higher against both the Euro and US Dollar than when we opened 2023 (3pc and 2pc higher respectively) and has been driven in large by the string of interest rate rises introduced by the Bank of England since late 2022. When we began the year the UK was reverberating from double digit inflation rates and close to stagnant economic growth. We all groaned as interest rate rises put further pressure on consumer spending and as we were repeatedly told by MPs and economists that higher rates of interest were needed to level out prices longer term, but these higher returns also made the Pound more attractive to investors and increased demand for Sterling, a positive for anyone looking to send funds out of the UK to buy or maintain an overseas property, as it steadily increased the value of the Pound.
This has been most apparent versus the euro, as the EU economic bloc also faced significant challenges particularly in the face of energy prices spiralling, as they relied heavily on Russian supplies prior to their invasion of Ukraine, and their slow response to global recessionary pressures driven by their sheer size. It takes some time to regulate and manage 27 different economies, and the European Central Bank has had to be much more cautious and measured in it’s increase to interest rates and reaction to rising inflation in the bloc. This has led to the Pound settling in levels over 1.15 versus the Euro since May this year having evaded 2023 until then and a key psychological level in exchange rates; it is a rate that still sits about a cent over the 5 year average in GBP/EUR exchange rates. The recent rangebound conditions therefore represent good buying power for those clients needing euros and should not be overlooked.
Performance versus the USD for the Pound this year has also been a positive story of increases in the Pounds value particularly through the first half of the year although it has begun to retrace some of these gains through Q3. The US economy has overall outperformed the UK in terms of interest rate rises, employment growth and wage rises but has been on a much rockier path than the UK which is moving slowly and steadily in the right direction it would seem. Also, a point to consider with the US Dollar is that risk appetite has a lot to play in the value of the USD. As the most heavily traded currency in the world (commodities are all priced in US Dollars) we see a lot of movement to the US Dollar in times of uncertainty or perceived high risk, is the recent increase in the US Dollars value (a 4 cent gain over recent weeks) therefore a sign that traders and investors are concerned that the recent calm in forex markets could be about to break?
Rule 101 in currency markets is that nothing will ever stay the same. The recent tight trading range versus the euro will break at some point, and the recent narrowing of this range, moving barely one cent and in a general downward direction for the Pound, could well be the first sign that we will see a breakout in the short term. Couple this with the increased strength in the US Dollar and the flight to safety here, the professionals are signalling a potential fear of a subsequent exaggerated move and perhaps increased volatility in currency markets for the last quarter of 2023. The recent pause by the Bank of England in interest rate rises, plus the much more palatable 6.8pc inflation rate could see GBP gains derailed. The risks of higher volatility are increasing, and those without a hearty appetite to risk and very flexible budgets when converting funds should take note. Our clients are on the whole either relocating overseas or purchasing/maintaining overseas property and not speculating on fx rates, do not get caught out by the relatively steady markets that 2023 have provided, the difference between the high and low in this ‘quiet market’ would still change the costs of a €200,000 property by over £9,000, a significant dent to any budget. Please reach out to discuss any upcoming requirements with the team, and brace yourselves, things could get rockier from here!
Data this week
Monday
EU Manufacturing PMI
EU Unemployment rate (Aug)
UK Nationwide House Prices (released at -5.3%)
US ISM Manufacturing PMI
Tuesday
AU RBA Interest rate decision
AU Construction and composite PMI
Wednesday
EU Producer Price Index
EU Retail Sales
US ISM Services
Thursday
UK Global construction PMI
US Initial jobless claims
US Goods and Services trade balance
Friday
AU Financial stability review
UK Halifax House prices survey
US Non farm payrolls
US Unemployment rate (Sep)