This week’s surprise announcement by Theresa May prompted quite a reaction in the Pound, rising almost 3% against the Dollar to a six month high. This was one of Sterling’s best days since the EU Referendum last June, causing banks such as Deutsche Bank and Credit Suisse to scrap their predictions that the currency would weaken further this year.
We’ve taken a look at what could happen in the coming weeks and some areas that you may wish to keep an eye on when planning your upcoming international money transfers.
Why is the Pound rising?
It is believed that the Pound strengthened due to expectations that the General Election could result in a significantly larger majority for the Conservatives. Electoral Calculus, for example, is currently predicting that Theresa May could increase her majority from just 17 to 134.* Some claim that this would allow May to disregard the more Eurosceptic members of the party, who could seek to prevent a more phased approach or a softer Brexit.
There are also suggestions that holding the election now could strengthen May’s position in the final phases of Brexit negotiations. Previously, the next General Election was due to be held in 2020, not long after the scheduled conclusions of talks. This means that there was potential for EU leaders to use an impending election to put pressure on Theresa May. Holding an election now instead removes the possibility of this happening.
Will the Pound continue to rise?
While the latest polls give the Conservatives a 21 point lead, the decision to hold an election is not without risk. For example, the Liberal Democrats are expected to campaign on an anti-Brexit platform, which could appeal to Remain voters who are opposed to the current ‘hard Brexit’ approach.
Elections have a tendency to bring uncertainty, which can cause unexpected fluctuations in the currency markets. If, for example, the polls start to become less favourable towards the Conservatives, this could have the potential to pause or reverse Sterling’s recent gains.
What factors could influence exchange rates?
There are a number of areas that could make a difference to exchange rates, with the potential to strengthen or weaken the Pound. Some areas to look out for include:
1. Polls: after Sterling’s sudden gains on the back of assumptions that the Conservatives will win the election with a much larger majority, expectations begin from a high point. This potentially means that a narrowing of the Conservative lead could cause the Pound to weaken if it starts to seem less likely that Theresa May will secure a significantly larger majority. Equally, an increased lead could support Sterling’s strength – although this seems less likely, considering Theresa May’s 21 point lead is above even when Tony Blair called the 2001 election.
2. The Economy: this is always relevant to whether a currency is expected to strengthen or weaken. A fast growing economy typically attracts foreign investment, rather than a slow growing or contracting economy. This global flow of money has an impact on exchange rates. The UK economy has so far outperformed forecasts by the majority of economists following the Brexit vote, with unemployment falling to its lowest level since 2005, as well as strong consumer spending and a pickup in manufacturing activity.
3. The Bank of England: at the most recent Bank of England meeting, one member of the Monetary Policy Committee voted for a rate hike, saying the economy didn’t need rates to be at 0.25% with inflation rapidly rising. The election adds an extra element of uncertainty into the economy that may cause other members to hold off joining their colleague in voting for higher rates, preferring to await the outcome. The markets reacted well to the last announcement, so a change in this approach could disappoint investors.
4. Brexit plans: Theresa May’s last speech on Brexit called for a “clean Brexit” – which appears to be an alternative phrase for “hard Brexit”. This could be part of a negotiating strategy to say to the EU that she is only seeking a deal on trade, to limit their leverage over the UK. It is possible that election campaigning might reveal more about the government’s actual preferences for the Brexit outcome, impacting the Pound. For example, any softening or hardening stance on freedom of movement is likely to influence market perceptions of a positive or negative outcome for the economy when the UK exits.
5. French elections: The latest polls are showing this remains a wide open contest. There are four top candidates who are within a 4% range of each, two of whom are anti-EU, far-right and far-left candidates who are seen as a potential risk for the Euro. Victory for either Marine Le Pen or Jean-Luc Melechon could be very negative for the Euro and may cause a sharp fall in the currency when markets open on Monday 8th May. On the other hand, if either centrist Emmanuel Macron or Republican Francois Fillon win, there is likely to be relief among investors, which could strengthen the Euro. The first round is this Sunday, and the top two candidates will go through to the final round on 7th May.
What does this mean for my money?
Whatever your foreign exchange requirements, HiFX could help you to make the most of your money or provide peace of mind during periods of potential volatility.
Rather than studying all the headlines, our rate alerts can help you to monitor the markets to spot a favourable rate. Simply log in to your account and select Tools and we’ll email you when the rate hits your target amount. If you don’t have an account, it only takes three minutes to sign up online.
If you spot a rate that you are comfortable with, there are a few options available to you with a HiFX account:
- Make a transfer online, 24 hours a day, seven days a week.
- For transfers of over £10,000, you can set up market orders, so your transfer is completed automatically when the market hits a certain rate. You can also create a forward contract, which allow you to secure exchange rates at the current levels for up to three years but make the majority of the payment later.
- If you need to transfer the same amount every month, such as for a mortgage or a pension, you can create a regular transfer agreement. These will transfer the same amount on an agreed day by direct debit, with a secured exchange rate for up to two years so you always know exactly how much you are receiving.
We also have options available to help businesses minimise the risk of currency fluctuations.
We hope that this information helps you to make a plan for your upcoming international money transfers. If you’d like to discuss your options in more detail, please give us a call on 01753 859 159.
*Based on opinion polls from 11 April 2017 to 18 April 2017, sampling 7,097 people.
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