The pound has weakened to its lowest point against the US dollar and euro since mid-December following the US and Israeli strikes on Iran. Retaliatory strikes from Iran have now stretched as far as Dubai and British interests in Cyprus.
Some hints had already hit the markets on Friday, which may have lessened the impact on the currency markets this morning, but so far it is all playing out for exchange rates as one might expect. A ‘risk off’ attitude has sent investments to safe-haven assets, which in currency terms begins with the US dollar, Swiss franc and Japanese yen. Against these, sterling has weakened by more than 1% against USD and a little less against the others.
The price of oil has spiked by almost 10%, but it’s hard to know if that will continue increasing or settle down. If the former, oil prices feed into transport costs, and then into general inflation, with a potential impact on interest rates, and so on.
Moreover, sterling being based on the UK largely being a service economy, the pound tends to follow stock markets, and these are down this morning. So the signs are not great for the pound.
Even so, for anyone making a large international transaction this week, and who hasn’t already protected their payments with a forward contract, the situation could be worse. GBP/EUR is down by 0.5% on the week, but other recent crises have seen it fall by ten times that amount.
Is there a risk of that happening? The other serious issue for sterling is the leadership of the country, following the loss of the by-election last week and threats to Keir Starmer’s premiership. When Boris Johnson was replaced by Liz Truss the pound lost 8% to the euro over the following month (and that was before the ‘mini-Budget’).
So, faced with that kind of risk, please call your account manager on 020 8003 4915 to discuss your currency strategy.
