Will stalling GBP suffer further as global tensions rise?

By Matthew Boyle

Since the beginning of the year, market focus and movement has strongly centred around Central Bank policy, and in particular interest rate intervention. With Lagarde and the ECB suggesting to date that there would be no interest rate hikes for the Euro, Bailey and the Bank of England stole the march last December by hiking rates earlier than expected due to UK inflationary pressures. However, this failed to abate rising inflation figures and last month in another attempt to bring it under control we saw another hike.

It seemed there was a clear programme of continued rises from the Bank of England with many suggesting we might see rates as high as 1.5% by Q4 and a clear contrast to the ECB and the single currency.

Consequently, GBP rates benefitted reaching a 6 year high against the Euro and sit currently within around a cent of that. However, the last few weeks may have resulted in a change to the previously charted course for GBP rates.

Following Russia’s invasion of Ukraine, investor sentiment has shifted significantly, and has seen the Pound be the second worse performer of all currencies in the last week and month (behind the Swedish Krona).

But why when the Pound was doing so well you may ask?

The outbreak of war has resulted in both markets and investors alike reducing the number of interest rate hikes expected by the Bank of England this year due to growing economic concerns. Given the Pound had the heaviest programme of hikes priced in it follows that GBP would suffer the worst. Higher interest rates add almost like a turbo boost to a currency (taking out all other factors) and so the Pound was charged up and looking set at high-speed. Now that sentiment is changing and expectation dwindling, we may well see the foot come off the gas.

And as conflict continues this effect will only be magnified and with the foot off the gas for GBP, we may in fact hit reverse. Moreover, should Lagarde and the ECB change their stance from the position of no intervention in rates, the shift in GBP>EUR price would be quick and the move significant. Before the Russian invasion and its effect the mere glimmer of an ECB rate rise saw rates drop 2 cents in a day so who knows what the impact would be this time.

With GBP-EUR rates currently sat within a cent of a 6 year high those who are waiting to buy Euros with hope rates may break through the established ceiling and run higher may like to strongly consider this and the associated risk and cost implication to their transfer through waiting.

Speak to your currency consultant at A Place in the Sun Currency today, who we can help guide you through the different ways you can secure your currency and reduce your risk in such an uncertain time.