The volatility in the pound/ euro exchange rate was centred on UK Chancellor Kwasi Kwarteng’s unveiling of his mini-budget in September, which outlined the government’s plans for the biggest tax cut package in 70 years, and a raft of unfunded tax cuts, including a plan to cut the 45p tax rate for the highest earners.
This went down like a lead balloon with financial markets, which saw it as increasing public debt, stoking inflation and working directly against the Bank of England’s (BoE) monetary policy objectives.
After an initial crash when the budget was announced, the pound selloff gathered pace after Kwarteng announced he was planning further tax cuts. Sterling has since been able to rebound above its pre-budget levels, following a £65bn bond market intervention by the BoE, and a U-turn from the government regarding the 45p tax rate cut. However, the rebound may be short lived, with analysts warning that the government’s credibility has already been undermined.
Ukraine concerns inject volatility into the euro
The Ukraine-Russia conflict has continued to infuse volatility into the euro over the past month. Ukraine’s successes in reclaiming territory in the north-east of the country initially provided some support to the single currency. Before the ‘partial mobilisation’ of Russian forces, Putin’s move to illegally annex four regions of Ukraine stoked fears of an escalation of the conflict. Meanwhile, threats of sabotage of European energy infrastructure also spooked EUR investors.
However, losses for the euro have been tempered by the European Central Bank (ECB), which opted to increase interest rates by 75bps (Basic Points) at the start of September, while signalling it could continue to raise interest rates aggressively, the prospect of more hikes helping to underpin EUR exchange rates.
The effect on your property purchase here
A drop in the value of the pound against the euro will naturally make it more expensive for Brits to purchase property abroad. For example, at the GBP/EUR exchange rate’s best levels in September you would need to transfer £258,620 to cover the cost of a Portuguese property valued at €300,000. The same purchase made when GBP/EUR hit €1.08 would cost £277,777. A difference of over £19,000. Meanwhile, average UK mortgage rates have spiked to an average of 5.7% since the budget, on the expectation the BoE will now raise interest rates more aggressively. This has prompted a mini-crash in house prices and could leave sellers worse off than just a few weeks ago.
Protecting your assets in the face of uncertainty
The outlook for the pound-euro exchange rate remains uncertain. UK fiscal policy concerns and the potential threat of Liz Truss’s government collapsing could see Sterling continue to fluctuate wildly in the coming weeks, while no end in sight to the Ukraine-Russia conflict could also lead to erratic trade in the euro.
At Currencies Direct, two of our most popular services in uncertain times are forward contracts and limit orders. The first allows you to fix the current exchange rate for up to a year for a small deposit. You’d miss out if the exchange rate strengthened, but your future transfer would be protected from any negative market movements. Limit orders involve setting a target exchange rate. You dictate a desired rate, and we perform the transaction should that rate be met.
Either of these services can help you limit your exposure to currency volatility, and ensure you get the best returns on your transfer
Currencies Direct have helped over 325.000 individuals and businesses move money abroad since 1996. They have an ‘Excellent’ Trustscore on Trustpilot, over 20 global offices and a team of more than 500 currency experts. You can also move your money over the phone, or use their online service and app to check live rates and make 24/7 transfers. What’s more, Currencies Direct is authorised in the EU – this is crucial as any currency provider offering their services to customers in Portugal must be regulated by a relevant EU authority.