Markets make the move to ‘risk off’ sentiment

By Lauren Buckner

Many global markets have seen a flight to safety over the past few days and the currency market is no exception. The US Dollar, the traditional safe-haven currency, has capitalised on this move and currently sits at a 19 month high versus the Pound and around five year highs against the euro. In turn this move recalibrates the levels that GBP/EUR trade at and has seen the pound lose almost two cents versus the euro over two days.

As we see a new round of lockdowns in China in response to Covid, fears of a global slowdown in growth are really beginning to bite. Following on from the impact of the war between Russia and Ukraine any drop in production from China is likely to see a further impact on price rises throughout the world and cause high levels of inflation to become entrenched. As inflation rises, consumers stop spending and economic growth slows. Commodity prices, commodity currency prices, equity markets and others are all beginning to fall. These are all markets linked with a healthy appetite for risk and illustrate how there is a significant flight to safety which is prompting such a surge in the value of the US Dollar.

The pound had benefitted significantly over the past six months due to expectations of a series of continued interest rate rises through 2022 with predictions of seeing interest rates over 2% before the end of the year. With the cost of living (inflation) surging, the Bank of England have moved to a more dovish tone over their past two meetings and the goalposts look to have changed. This is leading to a lower demand for GBP ahead of next weeks Bank of England meeting.

In comparison, the Federal Reserve in the US are presenting a more hawkish tone having now embarked on a policy to increase interest rates. This contrast with both the Bank of England and European Central Bank approach further fuels the demand for the USD intensifying the move in exchange rates that we are seeing.

Current market conditions remind us all that currency markets are purely speculative, they move based on sentiment. As fears filter through that the global ‘bounce-back’ from the Pandemic is troubled we will likely continue to see exaggerated moves in fx rates. This should remind you that if you hold off from purchasing any required currency you are taking a significant gamble.  We can help you secure your costs upfront depending on your circumstances, please contact your Account Manager to discuss in more detail.