Currency markets are notoriously unpredictable. Just when you think the conditions are right, a piece of news can unfold that moves exchange rates - which in turn can impact the value of your international money transfer. So what sort of things can move rates? And is there anything you can do to protect yourself?
Key factors that influence exchange rates
- Economic uncertainty
- Political stability and performance
- Government debt
- Interest rates
- Terms of trade (export and import prices)
Since the 2008 financial crisis, arguably one of the biggest determinants in a currency’s value is confidence – meaning how the markets view a country’s currency and its economy. In general, a currency tends to react negatively to political or economic uncertainty. Consider the impact of the UK electorate’s vote to leave the EU last June: the pound fell around 10pc, to a 31-year low against the US dollar, in the hours immediately following the result announcement, due to the uncertainty that leaving the EU raises for the UK’s economic future.
Economic announcements are certainly inclined to have a big affect on exchange rates. In particular, the actions of central banks - which are typically responsible for setting a country’s interest rate – are closely watched. This is because a rise in interest rates can be seen as confidence in an economy - and although the Bank of England voted to keep interest rates on hold in March 2017, the fact that just one member of the committee voted to raise rates based on decreasing unemployment and an upgrade in GDP growth expectations, was viewed as positive by the markets.
As a consequence, the pound rose around one cent against the dollar and the euro respectively, immediately after the announcement. Traditionally, central banks would raise and lower interest rates to keep inflation in check. But since the global financial crisis, the economic situation in many countries has been delicate, and in this environment there is arguably the possibility that raising interest rates could put pressure on the ability of some people to continue their mortgage repayments. In this sense, there has to be real confidence in the UK economy for the Bank of England to raise interest rates from their historic lows.
If an economy is weak – or perceived to be in slowdown – its currency is also likely to be relatively weak. At present, the signs are mixed in the UK. First quarter 2017 GDP growth came in at a lower than expected (at 0.3%), which is somewhat attributable to a slowing retail sector. However, a few days later purchasing managers’ index (PMI) data came in positive, rising to a three-year high – showing an improvement in the general health of the manufacturing sector.
It is never just one thing that impacts currencies. If we are looking at the value of the pound against the euro then we must also consider what is happening elsewhere. Sterling’s relative value can increase against the euro even in the absence of any domestic news, because news emanating from the eurozone could easily put pressure on the euro. As the more “market-friendly” candidate Macron won the French election, the euro immediately rose against the pound (marginally), but went on to fall back around 0.5% against sterling in the following 24 hours as the markets began to focus on whether or not the new President would actually be able to carry out his proposed reforms.
One fact remains: the unknowns of Brexit cast a shadow over the UK economy, and this has hit sterling - which is around 17pc down against the euro from its November 2015 high. Not discounting big events elsewhere, for sterling to rise against other currencies will likely require more confidence in the domestic political and economic outlook.
Can you plan ahead against currency movements?
As any number of things can affect exchange rates it is tough to predict exactly what will happen next. This is where the help of foreign exchange expert can prove invaluable, and is one reason the Telegraph has teamed up with specialists moneycorp to bring readers Telegraph International Money Transfers.
There is no obligation to trade until you are ready, and you are able to access expert guidance from the moment your account is opened. This guidance can help you to plan ahead – with the use of specialist tools – against any currency market movements. Taking just a few minutes to set this up now means that whenever you need to move your money, you will have experts on hand who can help you make the right decisions.
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Interest rates: http://www.cityam.com/261052/bank-englands-monetary-policy-committee-mpc-votes-leave
Reuters poll: http://uk.reuters.com/article/uk-forex-poll-euro-idUKKBN1781SP
UK PMI: https://www.poundsterlinglive.com/gbp-live-today/6715-uk-manufacturing-surges-in-april-as-domestic-orders-grow
Pound / euro: 1.429 17 Nov 2015 versus 1.18 5 May 2017 = > 17%
7-8th May after French election: 1.178 to 1.184 one day after (19.15pm) = 0.5%
16th March pound up: versus https://www.poundsterlinglive.com/gbp-live-today/6383-pound-sterling-and-bank-of-england
*correct at the time of publishing
The above article was created for Telegraph Financial Solutions, a member of The Telegraph Media Group. For more information on Telegraph Financial Solutions click here.
Information correct at date of publication.