Home » Currency 101 » What does a volatile pound mean for your property purchase?

The pound has been fluctuating recently, hitting a new 2021 high in November before falling just over a week later. But why has it been volatile and what do these movements mean for your overseas property purchase?

Red hot inflation

In the middle of November, the pound was given a boost due to several factors, including high inflation figures. UK inflation came in at 4.2% year-on-year for October, higher than estimates of 3.9% and a jump from the previous month’s reading of 3.1%. This was the highest reading since December 2011.

The higher-than-expected figure has increased expectations for an interest rate hike at the Bank of England’s next monetary policy meeting, which will take place in December. This prospect caused the pound to strengthen to a 21-month high against the euro and it continued to trade around this level, supported by some positive economic data releases.

Rising cases in Europe

The recent rise in cases on the continent, as well as the subsequent reintroduction of restrictions and lockdowns, have been beneficial for the GBP/EUR pairing over the last few weeks. Austria has a national lockdown in place until December 11, whilst the likes of the Netherlands, the Czech Republic and Germany are tightening restrictions.

So far, the Prime Minister has said that another UK lockdown is ‘extremely unlikely’, and that people should go ahead with their Christmas plans.

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The Omicron variant

However, during the last week, the pound’s fortunes were dampened by emerging news surrounding the new Omicron COVID-19 variant. Despite little being known about vaccine efficacy against the new variant and the severity of the symptoms, concerns mounted, and sterling weakened.

As the markets began to monitor and take a more considered approach towards the potential effects of the variant, this allowed the pound to gain some ground against the euro. However, this slight progress was hindered by an interview with Moderna’s chief executive, who expressed concerns over whether existing vaccines would be effective against the variant.

In short, sterling is currently reactive to any news or comments about this new variant of coronavirus. Any further developments regarding this, positive or negative, could impact the pound.

Sterling still strong overall

Although it has fallen in the past week, sterling is only marginally off its highest point since the pandemic began and 4% above its five-year average against the euro. With the new variant spreading and the UK going into winter, this could be a good time to lock in the pound’s rate ahead of your property purchase.

Why lock in the current GBP rate?

Imagine you are buying a home in Spain for €200,000. The price is in euros, but you hold your money in pounds. At the time of agreeing to buy the property, it will cost you £171,292 at the rate of 1.17. However, by the time you come to hand the money over a couple of months later, the pound to euro exchange rate has dropped to 1.13. The property will now cost you over £178,000 and you have to find an extra £7000 to pay for it!

Thankfully, Smart Currency Exchange can put measures in place to stop this from happening. The most popular solution is a forward contract, which allows you to lock in today’s rate for the next 12 months. This will ensure that, when it comes to paying for your property, you know exactly how much you are spending, and your budget won’t be impacted by fluctuating exchange rates.

To find out more about using a forward contract to protect your property purchase, fill in our short form.

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