Sterling’s major weakness in the near future is a potential weakening in risk sentiment which will also weigh on global stock markets, hitting risk-correlated currencies. According to analysts, global risk sentiment will remain one of the key external drivers of the UK currency. At the same time, if global developments improve and equities stabilise, the pound will still need a boost from domestic factors such as stronger domestic data to recover some of its most recent losses. For the pound to continue to strengthen, the market will need to become convinced that the medium-term growth outlook for the UK economy is improving markedly. This would require some real productivity gains to be realised over the coming months and years.

While UK fundamentals have proven to be supportive, the global picture is very important for Sterling, especially when stock markets suffer, risk sentiment is low, and investors are usually spooked.

Risk appetite in global financial markets

Analysts have noticed a pattern emerging where the pound falls against the euro in times of risk off conditions. The pound commonly benefits from strong global growth, which has also been the case for the euro. When there is limited financial risk, investors tend to take more risks, therefore creating a “risk-on” situation. However, when there is uncertainty and high volatility, what is also called a “risk-off” environment, traders want to avoid risk and they sell their higher-yielding assets and move their funds to safe-haven currencies.

The euro as a risk-off currency

While the euro like the pound has been the beneficiary of positive market sentiment, more recently, this has changed, and it seems that the single currency benefits against the pound when global investor sentiment weakens. What this means, is that the euro has become a risk off currency.

  • Risk off currency

A risk off currency gains when stock markets decline as investors want to avoid risk and sell their risky assets.

  • Cyclical currency

The euro used to be seen as a cyclical currency but is much less now. Cyclical currencies such as the pound and AUD tend to appreciate when global economic growth is expanding, unlike the US dollar, the yen and Franc which are seen as safe havens.

The euro has benefited when stock markets are selling off and it has given the impression that is a safe-haven asset. According to research from HSBC, due to the low interest rate environment in the Eurozone, billions of cheap euros are borrowed, sold and repatriated into euros, creating demand on the currency and “establishing an impression that it is now a 'safe haven' asset during times of market stress.” Head of FX Research at HSBC Paul Mackel explained that this shift in the euro “comes down to the low growth, low rates environment that has become seemingly endemic in the region,” and is “a consequence of the ECB’s quantitative easing programme and shift to negative rates.” Mackel added that "Signs that rates may be lower for even longer could encourage these outflows to continue, or even exacerbate them.”

"For many years, the EUR was seen as a cyclical play, which benefited from strong global growth. However, the last decade or so has seen overseas asset accumulation outstrip inflows from foreign investors. This could start to change the way in which the EUR behaves,” Mackel said.  

Pound-Euro outlook

If you are a business exchanging pounds to euros or vice versa, it is beneficial to understand this dynamic and how risk sentiment and appetite affect the currency pair. For the pound then to appreciate against the euro, there will need to be improvement in global market conditions. If, on the contrary, global growth and markets are at risk, the euro could appreciate. The rapid spread of another Covid variant or any quick move by the Federal Reserve to withdraw its financial support are seen as major risks to the global economy and the pound in particular.

If you are a business transferring funds overseas, contacting a currency specialist could save you time and money. Get in touch with Universal Partners FX and their dedicated team to discuss the latest market movements ahead of your currency exchange. If you are transferring funds to pay your employees abroad, get in touch with Universal Partners FX to find out how much you can save in your international money transfers. Universal Partners FX can provide invaluable help on efficient risk management and tailored solutions to your business’ transfer needs.

The outlook for Sterling will remain at risk as market analysts are cautious for the UK currency, especially with the new week having started with further pound declines.

Bank of England policy meeting

While the pound has enjoyed gains in the beginning of the new year and until recently, analysts are slowly becoming more cautious following last week’s sharp decline with traders less confident in the currency. Therefore, traders will focus on this week’s Bank of England policy meeting on Thursday for some direction for Sterling. If the Bank of England's Monetary Policy Committee delivers a more hawkish than expected message then the pound could regain some of its recent losses against the US dollar, analysts believe. On Thursday, the Bank of England will provide their latest assessment on the UK economy but is not expected to take any action and it will leave interest rates unchanged. It will be in August’s policy report that any possible major changes in the Bank’s direction will be announced, and the market will focus on such expectations and whether economic recovery will drive the Bank to change interest rates next year. If the Bank reveals any signs that it is going to move towards this direction, then the pound might be lifted by the end of the week.

Potential dangers for the pound

Some analysts believe that much of the positive news is already priced in and that the pound will be vulnerable to downside moves if economic data disappoints. It has also been noted that we should be more optimistic as the pound has responded rather well to economic data, but that currency risks are indeed real and could potentially hurt the pound. For example, there are currency risks related to the futures market as there are traders who are holding long positions—meaning they have purchased Sterling and are waiting for the currency’s price to go up—and when those positions are undone and the pound is sold, they will expose the pound to a fall.

There are also risks regarding the pound’s performance and the loss of momentum. The Sterling 2021 rally has now stopped, and this is a possible reason for concern.

Another possible reason for concern is the rising tensions between the UK and EU and a potential trade war about the Northern Ireland protocol. The EU has threatened the UK with tariffs on UK exports if Britain fails to implement the Northern Ireland protocol. Analysts remain cautious as discussions continue and further potential challenges arise. It was announced last week that the UK government requested from the EU the suspension of some elements regarding the Northern Ireland protocol until October, while they strive to reach an agreement on transporting chilled meat products from Great Britain to Northern Ireland. Any news regarding tensions between the UK and EU on the Northern Ireland protocol could trigger Sterling volatility.

Are you transferring funds abroad?

If you are a business transferring funds overseas, contacting a currency specialist could save you time and money. Get in touch with Universal Partners FX and their dedicated team to discuss the latest market movements ahead of your currency exchange. If you are transferring funds to pay your employees abroad, get in touch with Universal Partners FX to find out how much you can save in your international money transfers. Universal Partners FX can provide invaluable help on efficient risk management and tailored solutions to your business’ transfer needs.

 

If you are a business that needs to pay your employees and suppliers abroad or convert income from overseas, you must have used the services of a bank or a currency specialist to do so. Using a currency specialist such as Universal Partners FX comes with certain benefits that your everyday banking institution cannot possibly deliver. From saving you money in unnecessary fees as well as securing a competitive exchange rate, UPFX’s dedicated team can relieve you of the burden of worrying about the exchange rate eating into your finances. A currency specialist will always provide a more thorough service than any bank can, and the overall winner is the client - getting better rates and more in depth insights.

If you want to make the right decisions and get the very best value when operating in the currency market, here are a few tips to consider.

Plan Ahead

Many businesses make the mistake of dealing with their foreign payments on a day-by-day basis. This opens you up to a huge amount of currency risk as the rate can fluctuate wildly from one to day to the next. At Universal Partners FX, we always help clients plan ahead by assessing their currency risk for the next 12 or even 24 months against the current rates. A strategy like this devised by an expert who will monitor the market can start saving thousands after just a few months.

Ignore Rates (at least initially)

This might sound illogical, but rates are not the most important thing when devising a strategy for your business to get the best value on foreign exchange. Choosing a provider based on their lower rates may yield dividends initially, but what happens when rates move? Like anything, price doesn't tell the whole story. Look out for the array of services that enable you to be flexible when the inevitable movements occur in the market. A spot contract can help you secure an excellent exchange rate at the moment you want to make an instant transfer, but you can budget effectively and protect your business from unexpected market volatility by fixing an exchange rate in advance with a forward contract. UPFX also offers stop loss and limit orders when you want to target a specific exchange rate. A limit order enables you to make a transfer at your desired and predetermined rate when the market reaches that level. A stop loss order is also perfect when you want to protect your funds against an unexpected currency drop by setting a predetermined worst-case rate. These are off-the-shelf products, but every business is different so we always tailor our strategies to suit the needs of each client individually.

Define Your Risk Appetite

As well as limiting risk, our services can also do much more than that. For businesses that have a higher risk appetite, our currency hedging solutions can enable businesses to profit from positive market fluctuations. Of course, this comes at a risk - but if you are in a saturated market where competitive advantage is everything, these strategies can not only protect your business, but also provide extra value that you can pass on to your customers. So before you embark on any strategy, it is important for you or your foreign payment provider to consider what risk level is appropriate for your business to cope with. 

 

If your business requires currency services to boost your bottom-line profits, UPFX’s dedicated customer support team or your personal account manager will explain everything you need to know about making foreign transfers effectively. You can also use our simple and user-friendly online platform to transfer your funds in a fast, secure and affordable way. Get in touch now with Universal Partners FX and find out how you can get the best possible value from the currency market.