An interesting weekend in global politics has left the pound unchanged, but still around 1.5% up against the euro compared to this time last month.
It could easily have worked out differently. The pound tends to suffer – these days – in what is called a “risk off” market. That is where investors get nervous and put their money into safe assets such as the US dollar and Japanese yen.
The pound used to be a safe haven currency, not so long ago. Indeed, in most circumstances, the euro is today. However, less so when the risk in question is civil disturbance/war in Russia, a nuclear-armed dictatorship on your border.
For now, the situation looks stable. However, we often warn our clients about so-called ‘black swan events’ – those game-changing happenings such as the Covid-19 pandemic, global financial crisis and Ukraine War that were unforeseen at the time but in retrospect were always a possibility – and their devastating effect on a currency.
That is why, even if the world looks stable, it is always more sensible to lock in your rate with a forward contract as soon as you are committed to a major transaction overseas.
This weekend could easily have been another such event (and still could), with a great risk to the strength of the global economy.
Ah, you may say, but suppose a black swan event sends the pound shooting higher?
Sadly, the chance of that happening probably disappeared around the time that sterling became a currency whose strength was mainly based around service industries. It almost seems that the pound these days rises and falls more in line with share prices, and these suffer when there is trouble in the world. Look at the currency graphs for GBP/EUR or GBP/USD over the past 15 years and you will tend to see slow, steady rises and then sharp, catastrophic falls.
I have been around to see the effect of that on people who were caught mid-property purchase abroad, and it’s not a happy situation for anyone, but least of all the property buyer whose dreams disappear along with the strength of their currency.
To avoid the risk of being on the wrong end of such a fall, please speak to your trader today on 020 8108 5163 and lock in your budget with a forward contract.
