The current battle between central banks and inflation, via interest rate rises, makes guessing where exchange rates will go, impossible.
Because while out-of-control inflation is bad for an economy – and hence the country’s currency – interest rate rises usually boost a currency.
With the Bank of England potentially raising rates again by 75 basis points tomorrow, and the US Federal Reserve doing the same – maybe more – today, working out the effect of these policies on sterling is like reversing your car with a horse box on the back. You never really know whether a turn of the wheel one way is going to send you in the right direction.
Add to that the potentially successful but also potentially inflationary effect of Liz Truss and Kwasi Kwarteng’s growth strategy, the main parts of which will be announced on Friday, and guess is all you can do.
While that’s all still true, news this morning that Russia is partially mobilising its forces and has threatened nuclear war against the West has overtaken matters. The threat has unnerved the markets this morning – maybe not just the markets – leading to a “risk off” environment where investors look for safer assets, which in this case is the US dollar.
The effect on Europe is that the euro has weakened by around half a cent against the pound and to well below parity against the US dollar.
We talk about “black swan” events all the time, and how you can never guess where a currency will go from one day to the next. Today’s news just emphasises that. If you are mid-property purchase, or have committed to a transaction (or lifestyle) in another currency, it is vital to lock in a rate that you know you can afford. Please call your trader on 020 8003 4915 to discuss limiting your exposure.
Returning to the shorter term, one day’s sharp currency movements can reverse just as quickly. This week still has plenty of opportunities to rock the markets, with the Bank of England’s interest rate tomorrow and the fiscal event/mini-Budget on Friday.
Finally, a reminder that the end of September is the deadline for our summer referral bonus, with a draw for £2,000 worth of flight vouchers available if you can refer a friend. You can start that here.
