The pound has reached fresh highs against both the Euro and the US dollar in the last week, as weeks of general malaise and negativity for the pound seem to evaporate. The key question for many will be, is this going to continue?
GBPEUR levels have risen to three-week highs of 1.1582 in the last 24 hours, where we had seen a low of 1.1326 two weeks ago. The move on GBPUSD is more impressive, with the near 1.20 hit recently, the highest since August, a three-month high.
The pound was weaker as many of us will know because of many issues, most fundamentally the policies of the Liz Truss and Kwasi Kwarteng administration in the UK which led to markets rejecting the pound in protest.
Sterling had clawed its way back as the Bank of England made clear they would be there to manage inflation through higher interest rates, although the prospect of interest rates rising too sharply was also sterling negative, in creating uncertainty and fear over the damage interest rates being too high would cause to economic growth.
Looking to the last couple of weeks, Rishi Sunak and Jeremy Hunt’s plans seem to be much better received although there is still plenty of caution. Rather than everything suddenly being rosy, it is more that their more measured and careful approach to public finances has calmed markets, where the previous Prime Minister and Chancellor combination scarred them.
Looking to the reasons behind the rise for the pound, we can return to some of the earlier points in my post, namely the big rise for GBPUSD. The US dollar accounts for over 60% of globally traded foreign exchange, and where we see large movements and changes in sentiment on the US dollar itself, it can influence movements on other USD pairings, including GBPUSD, which can then influence that paired currency against other currencies, ie GBPEUR.
The pound has therefore risen against the Euro and other currencies in part because of a broad weakening of the US dollar, which has dragged the pound up against other currencies, leading to its rise against other currencies like the Euro.
In answer to the question will the pound keep rising, it may well do. But it can be argued the UK fundamentals are the same they were a week or so ago, when the pound was weaker. The UK is still likely headed for a deep recession, the Bank of England has predicted that this could last for much of 2023.
Yes, the pound has risen, and yes, this might well continue. But it should be noted that the move higher is not because all of a sudden markets are much more positive over the UK’s economic outlook, it is also to do with more global factors. The risk of a move lower is therefore very present, and a majority of the FX forecasts we had surveyed did predict this over the coming months.
Understanding fully the reasons behind movements in the FX markets can lead to better information and in principle better more informed decisions. We can provide guidance as to what is happening, and in combination with a range of tools and options, help ensure you can approach the FX markets and any payments you need to make, with more confidence.
To discuss any strategy relating to a currency exchange and what lies ahead next for the UK and the pound, please contact me directly on [email protected]
I have worked as an FX dealer for 13 years, and helped thousands of private individuals and businesses plan and mitigate their foreign exchange risk.