Oanda Senior Market Analyst Craig Erlam believes the GBP exchange rate depends on how the Brexit talks unfold and the political situation in the UK. Erlam says the US dollar is heavily sold and due for correction. He expects EUR/USD to revisit 1.10 handle.
Watch the full segment as Erlam details the key technical levels on the major pairs - EUR/USD, GBP/JPY and GBP/USD.
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At the current rate of fluctuation, with socio-political uncertainty reeking chaos in the markets, the pound’s performance leaves little to desire. Currency experts are now warning that further in 2017 we could see the pound hitting the same value as the euro.
According to the Sun, analysts have advised towards this possible plunge due to the general election, which resulted in a hung parliament, and the closing on the Brexit deadline.
Holidaymakers that are worried about the potential currency volatility ahead are being told to buy half their currency now and half closer to their break, as the pound could even break below the euro.
Finance Monthly has heard Your Thoughts on the possibility of a British value parity with the euro and included a few of your comments below.
Jonathan Watson, Chief Market Analyst, Foreign Currency Direct:
The prospect of the GBP/EUR exchange rate reaching parity or 1 GBP = 1 EUR has been raised many times over the course of recent events, before and after the Referendum vote. Throughout 2017 analysts have been split as to which direction rates will take, I believe there are two key features which explain why we are here and which will ultimately shape the likelihood of it being achieved.
Parity was almost reached in December 2008 when GBP/EUR hit 1.0227, since then the July 2015 high of 1.4345 had seemed to indicate such lower levels were confined to history. However, since 2016 and the result of the EU Referendum, politics has become the big driver on Sterling. Political concerns too have reached Europe and the failure of Le Pen and Gert Wilders to win any victory has seen the Euro strengthen. There is a German election in September and potentially an Italian vote too to be called in September, but, for now it seems the Euro has survived and this has helped it gain against the politically scarred Pound.
Economic data is the second factor and here too we see the Eurozone outshining the UK growing 0.5% in Q1 2017 against the 0.2% for the UK. Divergence in monetary policy is also key as the UK and the Bank of England could potentially raise interest rates to combat rising Inflation, threatening consumer spending and lowering GDP. Meanwhile the European Central Bank are looking to withdraw stimulus and maybe raise interest rates in the future, helping to further boost the positive sentiments towards the Euro.
Ultimately the prospect of parity is not going away and the outcome of the UK election is vital to determining how likely, as it effects who is on the UK side of negotiations with the EU and how strong their mandate is.
We are only 2 months into the Article 50 window and just coming up to the one year anniversary of the vote on the 23rd June. We have in the grand scheme of history just begun on this path and looking at what is ahead the prospect of parity for GBP/EUR this year remains a very real possibility.
Owain Walters, CEO, Frontierpay:
Ahead of the election, some analysts warned that the value of sterling will reach just £1 to €1. The political uncertainty following the election hasn’t eased the short-term risks to the Pound. However, I would argue that this result will, in the long term, be good news for sterling.
What I believe we will see next, as the Conservatives are forced to form a coalition with the DUP, is that Theresa May’s plan for a ‘hard Brexit’ will be diluted, if not taken off the table entirely. Since the vote to leave the European Union last year, the currency market has, on the whole, not responded well to the dialogue around a “Hard Brexit” and with the influence of a more liberal party in a new coalition government, the idea of a ‘softer’ Brexit will provide support to the Pound and we will see a period of strength.
The significant losses that the SNP has seen will also reduce the chances of a second Scottish independence referendum. While the notion of another Scottish referendum hasn’t done irreparable damage to the pound, taking it off the table at least for the foreseeable future will certainly give the Pound an extra boost.
Patrick Leahy, CFO, JML:
If the political events of the last two years have shown us anything, it is that situations that are improbable are certainly not impossible. Sterling/euro – or even sterling/dollar – parity is not out of the question. Whether you are an importer or exporter of goods or currency, CFOs across the country would rather the whole thing settled down and we had some certainty; but that’s unlikely. So what can you do?
Being in the FMCG market, JML’s short-term retail price is fixed, and it takes a good year to adjust prices. Just look at the large drop in sterling, post Brexit; it is only now that the inflation effect is really starting to trickle through to business and consumers. So, as a CFO with no concrete forecast on what will happen with the rates, you must try to minimise the impact any movement has on your pricing and margin strategy.
As a net importer, UK businesses and especially retailers are always susceptible to falls in rate, pushing up our costs, reducing margins, or lowering volumes. In some ways, the best strategy any business can have to manage exchange risks is to sell to other parts of the world – it’s a natural hedge. But, it is not that simple, because margins in each country are important and you can’t always point to your exchange gains when discussing gross profits with your invoice discount provider.
For retailers, the key is to not overstretch yourself if hedging on currency movement. Regularly and accurately forecasting your business performance is key to achieving this. It’s impossible to know exactly what your currency requirements are in 12 months’ time, but you know you will have some. You might win and lose on currency movements along the way but by slowly building your hedged positions you will have minimised the risks and helped the business achieve its margin along the way.
We would also love to hear more of Your Thoughts on this, so feel free to comment below and tell us what you think!
On 18th April 2017, the UK Prime Minister Theresa May announced today’s snap general election, 8th June 2017. Three years earlier than scheduled, May’s official reason was to strengthen her hand in the Brexit negotiations, which she feared the other parties would try and frustrate.
With 650 parliamentary constituencies, the general public will elect one Member of Parliament (MP) to the House of Commons for each. The Conservatives currently hold 330 seats, with 326 seats needed for a majority.
If the Conservatives add to their seats at this week’s election we could quickly see an escalation to the sterling £; rallying to new year highs of up to $1.32/33. However, as we draw ever closer to Election Day and with it the almost daily release of new polls and surveys showing support for Labour, we are experiencing a few wobbles. Recently, Labour has closed the gap from 20% behind the Tories to just 7% over the campaign, according to the average of the last 8 polls. Significantly, 7% holds a lot of weight – it’s the lead the Conservatives had going into the last election. Anything less than this figure and they could see their majority reduce, not increase.
Markets were spooked by last year’s wrong predictions and false surveys over ‘BREXIT’ and
‘TRUMPIT’. As a consequence, I think any poll or survey needs to be taken with a pinch of salt! Indeed, the latest round of polls over the weekend were also inconclusive. The weekend polls put the Conservative lead at anything between 1% (Survation) and 12% (ICM) - even the pollsters can’t agree. - says Steve Long, Chief Risk Officer at Avem Capital.
A big factor will be the uncertainty of the young vote. Whilst young people are more likely to vote Corbyn, they are also less likely to get out and vote.
The sterling currency pair will be nervous up to Election Day as liquidity and volume dries up and HFT and Algos disappear for a few days.
One question we ask is why make a market to be 5% offside immediately?
Another factor to take into consideration during Election Day will be the timing of the result. The result will likely be announced around 4am, when most of the UK is asleep. Early indications however, may come as early as 10pm on Thursday, when the exit polls are announced. In recent times, these have been generally more reliable than the pre-election polls, with confirmation of their accuracy proving evident as the first results are announced from about 1am onwards.
Possible result outcomes could produce the following permutations:
- A Labour win: £ drops 5/10%
- A Conservative majority: £ increases +3%
- A hung parliament would probably see a 3/5% spike in a very short time…say 30
seconds, before dropping significantly!
Recently we have seen the FTSE benefit from being cheap. This has given exports a helping hand, however a stronger £ would hurt the FTSE especially the FTSE250 which has just topped 20000.
A Labour victory or hung parliament would immediately turn the markets negative. We would likely see scenes similar to the day Brexit was announced, i.e. a 10% drop in seconds. However, before the excitement of Election Day, we first have the ECB and Draghi to contend with. He has already stated that he will say something special!
Taking heed from the Cub Scouts motto, “Always Be Prepared” …you can be assured that at Avem Capital, we are, always! - adds Long.
(Source: Avem Capital)
With the election on our doorsteps, Jonathan Watson, Chief Market Analyst for Foreign Currency Direct talks to Finance Monthly about the potential impact of the UK’s general election on the national economy and the pound.
This election has gone from being one of the most predictable to actually quite an uncertain event. With this shift in outlook we have unsurprisingly seen the Pound too, go from fairly stable to displaying the more predictable behaviour caused by political uncertainty. Whilst Theresa May remains the favourite, the potential for surprise is high as polls in recent years have been anything but reliable. With the Conservative lead having fallen from as much as 20 points to less than 1 point in some cases, the market is having difficulty pricing in the news and possible outcomes. On Friday we could easily be looking at a slim Labour victory or a Conservative landslide. I am personally expecting a small improvement on the current Conservative majority of 17 which could call into question Theresa May’s decision to hold the election in the first place if not sufficient for a Conservative win
Elections are by nature uncertain events as they raise the prospect of a change in the Government responsible for setting taxes, spending and economic policies. Elections also take time, and often consumers & business delay important decisions to wait for the outcome.
The UK election must also be viewed against the backdrop of Brexit, without which we would not be having this election. The main reason it has been called is, according to Theresa May, to improve her negotiating position. Critics suggest other tactics but where Theresa May has framed the election about Brexit and many feel she is the right person to handle those negotiations, Labour have however made the election about austerity and played some strong cards to appeal to voters.
Free tuition fees and free school lunches as well as increases in government spending are all designed to appeal to the masses and could well earn Labour extra support. Such plans, if they come to fruition could certainly see Sterling lower, as the Pound performed very badly in the run up to both the 2010 and 2015 elections when it looked like Labour may win and they pledged to increase spending as they have now.
Mrs May and the Conservative party aren’t perfect, having also failed to spark much imagination with their policies performing a series of U-turns and failing to provide clarity on taxation policies. Whilst committing to being a ‘low-tax party’, they haven’t explicitly promised not to raise taxes. Theresa May’s U-turn on the issue of social care, and indeed her decision to call an election have also contributed to her slide in both the polls and approval ratings.
The spate of terror incidents we have seen lately are another factor weighing on the market. Terror attacks typically cause a currency’s value to fall, and whilst Sterling had fallen, the Pound actually found favour as markets felt that voters would believe Theresa May could be better placed to handle such incidents.
Market participants, investors, businesses and consumers all contribute more effectively to society when there is confidence and certainty. The run-up to an election is by its nature uncertain, hence the fall in Sterling value, particularly with Theresa May having previously looked so likely to win by a considerable majority. If the polls are right and the lead has narrowed the result is likely to see the Pound decrease in value based on those previous expectations.
This election is absolutely critical to shaping Brexit negotiations. Theresa May might also end up looking foolish for calling the election. There is the outside chance of her losing power either through losing the Conservatives’ power or being forced to step down if they lose. My belief however, is that the Tories will have done enough to boost their majority but not to the extent we previously believed. Nevertheless this may be enough to boost the Pound and provide a little more certainty over the Brexit.
Following last week’s initiation of the Brexit process via the triggering of Article 50 of the Lisbon Treaty, Finance Monthly hears from Chief Market Analyst of Currencies, Jonathan Watson, who portrays a watchful outlook on the months to come, and how the tide can easily turn in the face of socio-political tiptoeing.
This week the triggering of Article 50 marks an important phase in the Brexit process. It is the beginning of the legal process by which the UK will leave the EU, signalling an end to months of uncertainty as to whether Brexit will happen. It is also the beginning of a whole new set of questions relating to the Brexit and how it will impact both the UK and the EU. From a currency perspective, I believe the Pound will have further to fall as the reality of some tough negotiations ahead weigh more on the UK. Nevertheless, Theresa May’s steely determination and clear vision has won her lots of support and indeed helped Sterling back from the brink earlier this year. Whilst I wonder whether such tenacity will be enough for such a monumental task ahead, I am also reminded that recent events have so often proved the more literal analysis of many of the negatives of Brexit have been proved wrong so far. It is still early days but it is in everyone’s interest to make this work and to remain hopeful for the future.
The UK economy is performing significantly better than feared which is extremely encouraging for the future. The weaker Pound has driven growth in firms who export as the discounted UK represents a good investment. However, the weaker Pound has pushed up import prices and costs across the UK from supermarkets to manufacturers, which is gently being absorbed into the wider economy.
The falling Pound has also led to a rise in Inflation which paradoxically, has seen Sterling higher as Bank of England policymakers debate whether or not to raise interest rates. Therefore, fears over higher inflation may not be such a problem, as rising interest rates may help the UK avoid any of the negatives associated with high inflation. Once Article 50 is triggered I can see Sterling falling as the complexity of negotiations becomes apparent. Nothing will happen quickly, already it has been made clear that the ‘Brexit bill’ must be agreed before negotiations commence. Trying to get all 27 members to agree one coherent position will also hinder time frames. France and Germany will also have elections to contend with this year.
These roundabouts and diversions on the path to Brexit will make life very difficult for Theresa May and the UK Government. All of this can very easily be seen to be damaging for the UK economy and Sterling. A lower Sterling is generally not a good thing for the UK as since we are a net importer (we import more form overseas than we export) a weaker Pound makes life more expensive for the UK as a whole.
However, I cannot help but be troubled by some of the looming questions and uncertainties arising from Brexit. A falling out with your biggest trading partner is never going to be completely without risk and the unpicking of some deep rooted social, political and economic ties is not good for business and confidence.
Whilst the resilience and flexibility of the UK economy coupled with Theresa May’s vision is gently receiving the backing of financial market, things can change very quickly. This leads me to suspect that whilst perhaps the worst fears will continue to be abated, longer term there could be greater challenges ahead which will harm the UK economy until we have clarity and certainty.
Business and consumer activity thrives when there is confidence and certainty, Brexit represents a massive change in the status quo which goes against what we know from a fundamental view.
Like it or loathe it, Brexit is happening and we must all come together and embrace it to make the very best of it. Business should be looking to make the most of Britain’s new place in the world but also remain cautious and plan for troubles ahead.
The Consumer Prices Index (CPI) recently measured annual inflation at 1.8% in January, which is 1.6% rise since December’s figure. This represents the fourth consecutive that the inflation rate has seen a rise, and the highest in over two and half years, since June 2014.
Alongside this, according to the RAC, fuel prices hit a two year high this month, while on the other hand the prices of clothes and trainers have fallen compared to this time last year. So, what’s happening with the UK’s economy, and why is the country’s inflation rate pumping month on month?
Below we’ve heard comments from a number of economy specialists and market analysts, who have given their say on the latest inflation rise.
Jonathan Watson, Chief Analyst, Currencies:
I believe Inflation is going to continue to present a problem in 2017 as the weaker pound continues to put pressure on raw material and fuel costs for business and consumers. The UK as a net importer relies on buying more from overseas than it sells to the rest of the world. Whilst the recent bout of sterling weakness has made UK goods much cheaper to foreign investors, as the weaker pound and higher inflation gently feeds into the economy the longer term effects are less beneficial.
The pound has fallen some 15-20% against most currencies since the Referendum result in June 2016. With the UK relying on imports of raw materials from overseas the rising price of certain goods is now feeding into a higher Inflation rate for the UK. The reason the effects of this have taken time is because many businesses that buy goods from overseas will have fixed the price many months before the goods were physically purchased. As time goes on and the pound remains weaker against its counterparts the price for companies to buy raw materials from overseas will be lower meaning for them to remain profitable they must raise prices.
The price of Oil is a key factor in all of this since the price of Oil was almost 50% less this time last year. The fact the price of Oil is priced in US dollars doesn't help since the pound has recently been trading at close to 31 year lows against the greenback. A high Oil price affects business and consumers by raising fuel costs. The price of fuel is a large part of many consumers and business fixed costs so increases have a wife effect across the economy.
With Brexit negotiations likely to commence in the coming weeks and there remaining huge uncertainty over what to expect I expect sterling will come under further pressure pushing Inflation higher again. The coming months will also see many businesses importing from overseas needing to renew their contracts fixed last year when the pound was stronger. These new contracts will be more expensive as sterling is weaker leading to a prolonged period of higher inflation as businesses seek to remain profitable.
As we are seeing with the recent trends Inflation rising in inescapable given the economic conditions. Whilst sterling has found some better ground as we have some certainty over the commencing of Brexit I feel there is a long way to go before the pound will be strong enough to make up for the effects on the rate of Inflation, some of which are still to be felt in the coming months. Businesses looking to buy goods from overseas should be planning carefully their future contracts to mitigate for further sterling weakness.
Professor Martin Walker, Professor of Finance and Accounting, Alliance Manchester Business School:
Today’s news about inflation increasing to 1.8% comes as no surprise. Given the very significant fall in the pound following Brexit the costs of imported materials, especially fuel, were bound to rise. Moreover, it is likely that inflation will continue to rise as increased costs continue to feed through to retail prices.
It is difficult to predict just how high inflation will go, but we are potentially looking at a peak value between 3.1 and 3.8 percent, probably around the end of 2017. It is also likely that the peak inflation rate will be substantially greater than pay rises, so real wages will fall a bit on average. This is likely to reduce consumer demand and, as a result, the growth rate in the last half of 2017 and the first half of 2018 is likely to be lower than it would have been in the absence of Brexit. Inflation is likely to start to fall during 2018.
What happens to the UK economy after 2017 is anybody’s guess. It will depend on how well the negotiations on Brexit proceed and also on news about new trade deals after Brexit in 2019. One particular issue that we all need to keep a close eye on, is the potential impact of Brexit on investment by overseas companies in the UK. If this does not decline then it will bode well for the long term. However, if it goes into a sharp decline then Brexit will start to look like a failure.
The only thing we know for certain is that Brexit has increased economic and political uncertainty both for the UK and for Europe as a whole.
Conor Murphy, CEO, Smartr365:
Annual inflation rising to its highest figure since June 2014 was an inevitable consequence of the devaluation in sterling over the past eight months following the Brexit vote.
Generally speaking, there has been a downbeat feeling for some time that inflation will steadily worsen, but I don’t completely agree and prefer to adopt a more positive outlook.
Though the figure released by the Office for National Statistics rose from 1.6% to 1.8%, this is still less than it was expected to be at this stage and I feel that while it is an issue, it is perhaps not as big an issue as it was forecast to be – so the outlook is not entirely gloomy.
That said, should the Pound drop again following the notification of Article 50, then thus would inevitably create further inflationary pressures. Time alone will tell and even financial experts cannot predict the future with certainty.
In my opinion, I feel that the worst/hardest Brexit possible is already priced in and – allowing for temporary fluctuations – I do not think the Pound will weaken further - if anything, I feel it will start to strengthen at some point,
The bottom line is that inflation may well pick up further, but I don’t think it will massively overshoot the 2% target and therefore it is not the end of the world!
In summary, I feel people should expect, and also get used to, slightly increasing prices, but largely offset by salary increases which are still keeping pace – or in many cases exceeding – the rate of inflation.
In a world where people and financial experts tend to err on the side of caution – with good reason – I admit I have a much more optimistic take on the future and prefer to always expect the best rather than the worst.
Charles Fletcher, Head of Analysis, Cogress:
After Brexit, there was an inevitably sharp slump in the value of the pound. This became one of the catalysts for the rise in inflation that we are seeing now. The weakened pound instantly affected imports and consequently, raw materials and goods became more expensive to buy with sterling. The upturn in price pressure forced shops to raise their prices, where consumers saw the cost of everyday products like Marmite increase by up to 10%.
As household incomes feel the pinch of higher living costs, accompanied by an uncertain job market, we are seeing signs of the property market softening. There is a strong connection between (rising) inflation rates and property prices. Some property owners may be excited by the price increase on their home, but when this is accompanied by rising inflation the real increase is negligible. This is because of the growing cost of building materials. If the price to build goes up, less properties will be built, which directly impacts the market’s levels of supply and demand. Not to mention the correlation between interest rates and inflation, whereby if less mortgages are taken out that means less people are getting on the property ladder.
‘Caution’ may still be the operative word to describe the property market for many economists and property researchers, but we are still seeing banks lending, developers building and buyers purchasing homes. Nationwide predicts price growth of 2% for 2017, which is higher than most, despite it being more than half of 4.5% growth last year. The key point is that now, while the top end of the market (£1m+ homes) has taken a hit in both price and transaction levels, the <£1m market has soldiered on admirably amidst rising inflation rates and Brexit. Therefore, the tale of the UK vs. London property market (or even Slough versus Chelsea) will tell two very different stories, especially for how inflation will affect those consumers and their behaviour.
Ranko Berich, Head of Market Analysis, Monex Europe:
Low inflation and strong consumer spending have been two of the dominant features of the UK economy in recent years, driving GDP growth to exceed the Bank of England’s expectations during the post-Brexit vote period. But sterling’s sharp fall in the wake of the EU referendum has set the UK on an inflationary path, while at the same time consumers have dialled back spending sharply.
We’ve yet to see the bulk of the inflation expected in 2017 due to past depreciation in sterling. For example, inflation in food items is only just beginning to pick up due to cutthroat competition in the supermarket sector. Recent survey data also points towards surging input costs for manufacturers. So, despite January’s year on year CPI inflation being the highest since 2014, we’re likely to see even higher figures in the near future.
How the consumer reacts is crucial. The fall in consumer spending in the three months to January was the first since 2013, but it’s a volatile data series and the move could simply be a small pullback after a long, steady upwards trend. However, the timing coincides with an increase in average store prices, suggesting that as prices continue to rise consumers will keep dialling back, potentially resulting in a significant GDP slowdown in 2017.
The UK economy has indeed exceeded almost all expectations for the post-referendum period, resulting in criticism of the Bank of England’s alarming forecasts. But with inflation beginning to bite and a big question mark hanging over the direction of consumer spending, the UK economy could lose the underwrite it has long enjoyed from a strong consumer. The BoE’s initially dire predictions could ultimately be proved correct.
Owain Walters, CEO, Frontierpay:
The data shows a mixed picture, with consumer inflation coming in slightly below market expectations (1.8% vs. 1.9% expected), while manufacturing prices show a slightly higher inflation than expected. This would indicate to us that a further rise in inflation is due, as the rising costs of goods are still to fully filter through to the consumer. However, whilst it is currently popular to panic about the economic data in the wake of the Brexit vote, we would point out that inflation is still below the Bank of England’s 2% target and the current rise in inflation is a one-off event due to the devaluation of Sterling. The markets expectations have been dashed this morning and as a result the Pound has lost about 1 cent to the US Dollar and about 0.8 cents to the Euro.
We would also love to hear more of Your Thoughts on this, so feel free to comment below and tell us what you think!
With an in-depth analysis into the overall effect of the pound’s fluctuation on small businesses, here Saskia Johnston, Foreign Exchange Expert at Sable International provides exclusive insight for Finance Monthly’s economy savvy on several ways SMEs can protect themselves for the coming years.
As we wait to see what kind of effect the UK’s looming exit from the European Union will have on the national economy, there is very little in the way of absolute certainties. The weakening pound is one of the only tangible consequences of the vote so far (political unrest notwithstanding), to the point that HSBC’s chief currencies analyst described it as the ‘official Opposition’ to the Brexit-enabling UK government.
But beyond the politics and macroeconomics of it, a weak pound has an immediate effect on the bottom line of many UK-based SMEs. Any company importing products from Europe has seen costs rise by at least 22% - enough to deliver a serious blow to margins, and for businesses with sensitive enough cashflows, enough to be outright lethal.
If you’re running one of these SMEs, it’s vital to protect your organisation against exposure to the weakening pound. Here’s how.
Forward contracts
As the UK and the EU continue to circle around each other, each peering suspiciously at the other, currency markets will continue to be volatile. Uncertainty is the new norm, so make use of whatever certainty is available.
Forward contracts represent a kind of security, if not certainty, for any company with a foreign currency amount due at an agreed date. They involve you agreeing a fixed exchange rate at a certain point in the future, and can cover an individual payment or multiple payments across different periods of time.
By setting these dates in advance, you effectively agree to buy or sell the pound at the predetermined price point for up to a year in advance of the sale or purchase. This removes currency risk for you and your supplier or customer – after all, for all that the pound has weakened in recent months, it also tends to shoot back up at times that might be inconvenient for the other party. It may limit your upside gain, but it takes the element of chance and the risk inherent in a changing political context out of the equation – allowing you to lock in your profit and continue working on your projects without losing money.
Limit orders and stop-loss orders.
If your currency exposure is shorter, it may be worth setting up limit orders on certain transactions. This has one chief benefit: it allows you to set a price target above where the market is currently trading, ensuring that your orders are automatically filled when this price is hit. This offers a clear upside and allows you to cover your bases in the event that the pound outperforms expectations.
Stop-loss orders offer the opposite, doing exactly what the name implies: preventing unnecessary loss. They insure you against the possibility of currency underperformance, allowing you to set a “worst case” price against the current market level.
Your order will be filled if the market drops to (or past) your protective price.
One Cancels the Other (OCO)
Of course, limit and stop orders are naturally complementary, and it’s possible to use both as part of a combined One Cancels the Other (OCO). This kind of arrangement allows you to run a limit and stop-loss order together, ensuring that the second your upper or lower price limits are hit, your orders will be filled – with the unfulfilled price target being immediately cancelled. You can also split your gross amount up into a number of smaller transfers if your currency need isn’t especially pressing.
This goes some way towards mitigating your risk and improving your trading position. When you know what your upper and lower rate limits are, much of the uncertainty of currency fluctuation is entirely removed – allowing you to ring-fence your revenues and focus on the things that matter most to your company, rather than the economic and political factors you can’t directly affect.
Of course, every business has different requirements, and the solution that’s most appropriate for yours won’t always be immediately clear. To truly hedge against the uncertain, it’s important to seek the right foreign exchange advice. Currencies may be unpredictable, but you can set your business up to make the most of them.
Last week reports indicated that UK inflation had reached its highest point in two-and-a-half years in December, after an unexpected rise in core prices pushed top levels upwards 1.6%. Here Finance Monthly benefits from an exclusive in-depth breakdown by Market Analyst Jonathan Watson at currencies.co.uk, who explains how recent spikes in inflation can have a dramatic effect on consumers, business and the rest of the public.
Inflation, the rate at which prices increase is in itself not a bad thing. However, in certain economic circumstances it can cause problems, particularly for the public at large. The UK as a net importer buys more from overseas than it sells. That means that when the Pound is weak or has a big fall as has happened since the Referendum vote, the cost of importing goods goes up. With the Pound expected to remain weak Inflation is expected to push higher in 2017. The good news is that wage rises are increasing as well, the bad news is that it might not be enough to keep pace with the headline rates of inflation in the wider economy meaning the public will overall have less money in their back pocket.
UK Inflation
Inflation is the rate at which prices rise. In an economy prices are continually changing according to various economic, political and social reasons. A degree of Inflation is acceptable and welcome in an economy since the opposite ‘deflation’, where prices fall is most unwelcome as it can severely hamper an economy as consumers and business delay purchases, anticipating their purchase will be less costly in the future.
In the UK Inflation is targeted at 2% and the main measure used is the CPI or Consumer Price Index. This looks at a continuous ‘basket of goods’ and assesses their changes in price over time. The latest Inflation report showed 1.6% which is the highest reading since July 2014. Throughout history there have been some big swings in Inflation, in the 70’s it was over 25%.
How does it affect the public?
Rising Inflation pushes up prices so the main effect on the public is to make goods and services more expensive for consumers and business. Rising prices therefore puts more of a squeeze on consumers as they have less money to spend. It puts pressure on businesses because they have to make a decision on either raising prices to cover their increased costs or reducing their profits. This negative impact on business impacts the public with either higher prices to the consumer or the prospect of workers being laid off as the business has to cut costs. Overall spending in the economy therefore declines as consumers and business have less money to spend as a result of the higher prices.
For example, fuel prices have been rising since oil is priced in US Dollars. The price of oil has risen globally (in itself an inflation boosting factor) but the fact the price of US Dollars has increased over
20% since the Referendum result further exacerbates this issue. Rising fuel prices will be an unescapable cost to the some 30 million cars on conventional roads. Businesses reliant on road haulage will see increased costs. Much of the UK’s food in supermarkets is delivered by road and therefore affected by fuel costs. Rising fuel inflation is a classic example of a negative effect for the public. It will mean the individual consumer will have to shell out more to fill their tank to drive to and from work and to take the kids to school. And when they finish work and stop to pick up their food to eat, there is a good chance Inflation will be making their weekly shop more expensive too.
There have been numerous high profile cases of rising food prices themselves. Back in October Tesco and Unilever fell out famously over the price of Marmite amongst others. We were told this would be the beginning of many such cases and almost weekly we are hearing fresh news of a household brand putting up prices. This weekend reports Nestle put up prices of coffee 14% will not be the last in this ongoing saga. One way or another rising prices feed into the wider economy. According to the Sunday Times Sainsbury’s raised the price of Nestle coffee by 14% this weekend whilst raising another Nestle product Pure Life Spring water 22%.
But it is not just necessities such as fuel and water that has risen. Luxury goods as such have also risen as international brands not only respond to the fact a weaker Pound means less value in their own currency, but also to try and keep prices harmonised globally. It was reported that Brexit saw a surge in luxury product sale in London as wealthy foreign shoppers arrived to take advantage of the cheaper products. Examples include Rolex, Burberry and other luxury items. Many of these brands have increased the price of their goods. Rolex last year raised prices by 10%, Apple increased the price of all their products last year too. And more recently raised the price of apps in their app store.
What does the future hold?
The key concern is whether Inflation will rise faster than wages. So far wage increases are running around 2.8% whilst CPI is as reported 1.6%. The worry is that wage inflation will not be able to match the price of CPI throughout 2017. The National Institute of Economic and Social Research (NIESR) have predicted inflation may rise to 4% this year.
This will mean consumers will have less money in their pocket which exacerbates the problems outlines above of less money in the economy. Retail Sales in December were much lower indicating the higher prices in the shops are starting to bite. Many business importing raw materials and products from outside of the UK will have hedged on their currency some 12-18 months ago. They will therefore have not yet been forced to raise prices as they are not buying at the new lower exchange rate. With the Pound having dropped some 10-15% since the Referendum eventually the UK as a net importer will have to pay more for the goods and services it is buying from overseas. 2017 will be the year this starts to become much more apparent.
One tool to combat Inflation is to raise interest rates but this can have its own implications. For example as interest rates rise it will help savers but put up repayments for borrowers. Credit card debt has been rising to almost pre-crisis levels prompting the Bank of England to warn it is closely monitoring this situation. If Inflation rises dramatically an interest rate hike is very likely but whilst this will help cool the inflation rise (and help Sterling strengthen) the potential negative factors on borrowers is probably not worth the benefit to savers.
All in all, some Inflation is good and welcome in an economy, but if it starts to bite too much into people’s back pockets and in turn hurts business and the wider economy this is not good. Rising Inflation can increase Unemployment, lower GDP and dent both business and consumer confidence. With the weak Pound being a key contributor to rising Inflation and the Pound likely to remain low in 2017 and beyond, rising Inflation is an issue that is going to continue to affect the public until it is understand what Brexit actually entails.
UK consumer price inflation rose by more than expected to 1.6% in December, from 1.2% in November. Consensus forecasts had pointed to a smaller increase to 1.4%. This is the highest rate since July 2014.
The market reaction to the figures was muted, with both the FTSE and the pound largely unaffected.
The main contributors to the acceleration in inflation were motor fuels, air fares, food and clothing – all of which have been affected by the weak pound. Food producers have faced sharply rising input costs, while oil is of course priced in dollars.
More inflation to come, in the short term at least…
December’s producer price data contains a strong indicator that higher inflation is coming. Input costs rose 15.8% year-on-year – the highest figure recorded for more than five years. It’s unlikely cost increases of this magnitude can be fully absorbed by firms, leaving them with little choice but to pass some on to consumers in the coming months.
The Bank of England says CPI inflation will exceed the 2% target by the middle of the year, though I wouldn’t be surprised if it happens sooner than that. Mark Carney also says the resulting squeeze on household budgets will cause the economy to slow as we move through 2017.
…but longer-term inflation should remain structurally low
However, the effect of the weak pound, assuming it doesn’t fall much further, is a one-off factor which will fall out of the figures eventually. The longer-term picture is one of structurally low inflation – due in part to demographic reasons. The baby boomers are starting to retire and have already gone thorough their consumption phase – they have bought their houses, cars and consumer goods. The younger generation is saddled with debt and struggling to get on the housing ladder. Workers don’t have the bargaining power over pay they once did, and wage growth looks set to be anaemic at best.
All this should mean less inflationary pressure and relatively lacklustre economic growth. Assuming the Bank of England is prepared to ‘look through’ what looks like a temporary spike in inflation, this should mean interest rates remain at rock bottom for the foreseeable future.
Authored by Ben Brettell, Senior Economist, Hargreaves Lansdown.
(Source: Hargreaves Lansdown)
The United Kingdom’s decision to leave the European Union (EU) had a seismic impact on the global financial markets, and the geopolitics that sustain them. But what if the so-called Brexit referendum had a different result, and Britons voted to remain in the Single Market? Would we be any better off today? This week Finance Monthly heard from Evdokia Pitsillidou of easyMarkets regarding the titled question.
By any measure, the British pound may have certainly had a better fate had Britons voted Remain. Sterling was trading around $1.48 US on the eve of the June 23rd referendum, and even reached $1.50 just after polling stations had closed. Hours later, sterling was down to $1.33, having lost 10% against the dollar and reaching its lowest level in 31 years.[1]
But the bloodbath was not over. By October, the pound had dropped below $1.22 after newly appointed Prime Minister Theresa May signaled she would pursue a “hard Brexit” from Brussels. It was during this period that the sterling found itself trading at 168-year lows against a basket of other currencies.[2]
Although the pound was on a long-tern downtrend prior to Brexit, it is inconceivable it would have depreciated so quickly had the Brexit vote gone in favour of the Europhiles. Had the UK opted to remain, the pound may be lower than it was on the eve of the referendum, but not 18% lower as it is today. Brexit was therefore not just a defeat for the Europhiles, but for the once mighty sterling.
Brexit had the opposite effect on British stocks. The sharp depreciation in the pound was a boon to the export-oriented FTSE 100 Index, which opened 2017 on the longest run of record highs since 1984.[3] By January 10, London’s benchmark index had established its longest winning streak on record, printing nine straight days of record gains.
British stocks have returned nearly 19% since the Brexit referendum and are up more than 28% year-over-year. Underpinning their growth is more than just a weaker local currency. Less than two months after the Brexit vote, the Bank of England (BOE) slashed interest rates for the first time in over seven years and expanded the size of its asset buys in an extraordinary effort to stave off recession. The Bank’s moves may have been almost unthinkable had the UK voted to remain.
Just a few years prior, experts had tipped the BOE to be the first major central bank to raise interest rates. While the Fed beat it to the punch, it highlights just how unlikely the Bank’s rate cut would have been had Brexit gone the other way.
For policymakers, the hefty dose of monetary easing was justified, given they had just made their biggest quarterly downgrade of growth forecasts on record.[4] Thankfully, the British economy has held relatively firm over the past seven months, but that may to change moving forward once the British government triggers Article 50 of the Lisbon Treaty, the formal mechanism for leaving the EU.
Brexit may have also unleashed a wave of pent-up populism across Europe that is threatening to leave Brussels behind. Following the UK vote, nationalist movements in France, Germany and Italy are awaiting their opportunity to break away from Brussels. With elections in France and Germany coming up, investors are bracing for a potentially volatile year in the market.
The outlook on the global market wasn’t good before Brexit, and it certainly isn’t any better in the wake of the landmark vote. Concerns about free trade, economic growth and financial market stability have been exacerbated by Brexit, and the negotiations for the separation have yet to even begin.
A High Court ruling last month stipulated that Brexit cannot happen without parliamentary assent, setting the stage for a bigger legal battle for the British government. Prime Minister May appealed the decision, but may be upheld by the Supreme Court later this month.[5] For the Brexiters, this may mean a contingency plan. For investors, this may mean greater uncertainty about when, and if, Article 50 will be implemented. And as we know, uncertainty is the bane of the financial markets.
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[1] Katie Allen (June 24, 2016). “Pound slumps to 31-year low following Brexit vote.” The Guardian.
[2] Mehreen Khan (October 12, 2016). “Pound slumps to 168-year low.” Financial Times.
[3] Tara Cunningham (January 10, 2017). “FTSE 100 record longest run of closing highs since 1984 as Brexit fears hurt pound.” The Telegraph.
[4] Catherline Boyle (August 4, 2016). “Bank of England cuts key rate for the first time in over seven years to 0.25%.” CNBC.
[5] Reuters (January 11, 2017). “UK government expects to lose Brexit trigger case, making contingency plans – report.”
