FX Update; Predicting the Pound’s (£’s) performance in 2023

Having fallen against the US Dollar since Q2 2022, the Pound has recently touched fresh highs against both the Euro, US Dollar and many other global trading currencies, raising the question; will the Pound continue to rise from its October lows, when it flirted with Euro and Dollar parity, thanks to ex-PM Liz Truss.

The UK’s currency, in reality, has made an incredible recovery, after the battering it received from the market, in the wake of the Kwasi Kwarteng ‘mini-budget’ fiasco; moving over 20 cents (>20%) higher against the Dollar, and 10 cents (>10%) against the Euro.

When you consider that common movements across these pairings might be a few cents or low single digit percentages, these are remarkable figures, especially over such a short period.

These figures are not in line with usual Pound/Euro and Pound/Dollar high to low movements, and demonstrate how unpredictable and volatile the currency markets can be.

The shift in rates and sentiment reflect renewed confidence in the UK, but it is also due to significant global factors and particularly the weakening of the US Dollar against most other currencies, which has amplified sterling’s movements.

The US currency’s weakness has been triggered by the Fed’s apparent reluctance to raise interest rates at quite the same pace as predicted.

The weaker Dollar has dragged sterling higher, and pulled the Pound up against other currencies including the Euro, but there could be signs that this recovery is stalling and struggling to break higher.

The Bank of England meet today to consider their latest interest rate decision, with the expectation for an interest rate hike, which would be supportive for the Pound. However, whilst it is likely the BoE will raise interest rates, it is likely that the market will already have ‘priced in’ that eventuality.

What might be more interesting is assessing what the pace of interest rate hikes might be for 2023, as the market will try to gauge the potential for further moves higher, with positive impacts on the Pound next year.

The Pound is near multi-decade lows and the risk of a major decline is limited, so traders are expecting to see the Pound appreciate against the Dollar and remain relatively stable against the Euro in 2023.

However, the UK typically runs a current account deficit and this imbalance would typically create an outflow of currency, to pay for imports, which puts downward pressure on the Pound…which makes our exports more competitive.

We are constantly monitoring and sharing the latest news on market influences, including currency FX and macro-economic performances, which can impact our customers supply chains.

For advice and recommendations on de-risking currency fluctuations please contact Laurence Burford, our FD and global currency trading guru. We know what is going on – following the barometer of global trade and money markets – and are happy to share this knowledge, to ensure that you are achieving the best return on your money – literally.