Sterling sunk significantly against both the euro and US dollar in early trading this morning. While it has recovered somewhat against EUR, there’s little sign of that so far against USD, where the strength is with the dollar due to rising US wages, rather than particular weakness in the pound.
That said, this is a big week for the pound. The first issue is the interest rate decision on Thursday. Traders expect a modest rate rise, so if the Bank sticks with current rates the pound is likely to fall further.
There is also the threat of trade sanctions from the EU if there is no agreement to end the stand-off on Channel fishing rights.
On top of all that we have, of course, continued worries about Covid/flu rates as the weather gets colder, and the effects of rising energy and wage costs on business.
It was interesting on the Radio 4 business news this morning to hear a rather smug energy executive saying he’d “hedged” his gas purchases several months ago and was feeling very confident about the future, despite everybody else’s gas supplies rising in price by over 200%.
Hedging is another word for a forward contract. The name comes from the traditional hedge surrounding a field, it just means putting a barrier round your potential losses. In currency terms that means fixing your exchange rate at a level that allows you to fulfil your plans, lest the exchange rate moves against you to such an extent that you can longer afford to fulfil them.
For property buyers, looking at an exchange rate as we had last week for GBP/EUR, at or close to a 20-month high, there is a tendency to irrational optimism. That’s where you see the exchange rate looking terrific when looking for an overseas home and assume it will be like that when you come to pay.
The irrational bit is in overlooking potential problems and assuming that if GBP/EUR has strengthened to this level, why not further? Looking at today’s currency graphs and the issues facing the economy and country, that could be said to be irrational.
The pound may go up or it may go down – do take a look at our new Quarterly Forecast for more insight on that – but I certainly wouldn’t bet my future plans on which way. So to lock in today’s rate, call your trader on 020 8108 5337.
