It has been an explosive couple of days for UK PLC; over the weekend comments by the Chancellor Phillip Hammond and Prime Minister Teresa May have caused markets around the world to look unfavorably on the pound. After confirming that the UK might look to leave the single market if we don’t get favorable terms for Brexit, GBP dropped by around 1.5% against the Dollar and Euro. Funny thing is the Euro almost hit parity with the Dollar over the Christmas period and this seems to have been swept under the carpet. The Euro has recovered (slightly) to around $1.06 from a historic low of $1.0360, but like the GBP, a long streak of turbulence lies ahead for the Euro.
Heading back to GBP territory though, it is now sitting at it’s lowest point against the Dollar for 31 years hitting $1.1989 over the weekend, this is set to push the price of imports up substantially. Consumers should now be prepared for more companies putting their prices up and those chocolate bars we all love so much to be that little bit more pricey. On the bright side if you’re moving Dollars to the UK, the rate has never been better, perfect if you sell products in the US and need to repatriate your revenue. Sadly on the reverse of this US businesses selling products in the UK are getting far less for their pound than at this point last year, which in turn makes the UK a little less attractive for overseas businesses selling products here.
This has been scheduled for a while; but Teresa May has a major speech about Brexit tomorrow, which should see some big movements in GBP. You can expect her to be upbeat about UK PLC but also calming trying to reassure the world that the situation for the UK once article 50 is invoked will be business as usual. For those of you wanting clarity about the negotiations involved in leaving the EU, you may be a little disappointed. I think the Prime Minister will simply say that we are going to choose control of our borders and leaving the European Court of Justice over continued membership of the single market, if it comes down to that. Does this (a hard Brexit) make much business sense? I think the majority of people will say no, but we will only truly know the effects once we step into the unknown. That is unless the negotiation team does such a blinding job we get all the above and continued membership of the single market (rather unlikely i’m afraid).
The Prime Minister will be speaking at around 4.00pm Tuesday, so watch out for some major movements in the GBP exchange rate around then. Expect her to be largely upbeat which should have a positive effect for Sterling.
Moving on from the gloomy state of GBP, we have the inescapable presidential inauguration this Friday where Donald Trump is going to become the 45th President of the USA. Despite all the predictions that the markets wouldn’t look favorably on him sitting in the White House, the US economy has been going from strength to strength. The Dollar has reached historic highs against most major currencies and the DOW Index has almost gone over 20,000 for the first time ever. This is all fueled by optimism that Trump will cut taxes and start deregulation in lots of industry sectors. Will his first few hours in office be the disaster that so many have predicted or will it simply be like any other day, just with a new face sitting in the Oval Office? My thoughts are more in tune with the latter of those options, lets just hope President Trump stays away from those beauty pageants and overnight hotel stays!
A key point to remember for the coming weeks is that at some point in March the UK will trigger article 50, you can expect a lot of uncertainty leading up to that time and also straight away after. For businesses who operate on an international level, you need to plan ahead and start looking at strategies to insulate yourself from any turbulence.
If you’re a business affected by currency fluctuations, one of the best ways you can avoid all the uncertainty is to take out a ‘Forward Contract’ with a currency broker. What this does is allow you to fix an exchange rate for usually up to 1 year from booking the trade. Sometimes you are asked to pay a 10% deposit based on the total amount of the contract, however if you have been trading with the broker for a long time this can be reduced. For example; if we take the exchange rate for GBP / EUR in May 2016, you could’ve booked a forward contract for up to a year at the rate of around €1.30. If the contract was for £1 million you then ‘draw down’ on this over the course of the year and perhaps you would’ve reached January with £500k still fixed at €1.30 instead of the €1.1350 it’s at now. This is definitely something to consider and worth talking to a broker about if you have any questions.
If you’re interested in speaking with a currency broker about any transfers, forward contracts or what they predict for the rocky road ahead, you can find some links below to three that Currency Pal rate as the best to work with.
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