The pound problem

By Ben Mitchell, August 18, 2011

If you just landed on earth in the past few weeks, having come from outer-space, you could be forgiven for thinking that you had arrived at a time when the world was in a state of collapse.

The streets have been burning and so have the markets, with falling stock prices, banks reporting huge losses, investors running for cover and the whole world seemingly pitched head-long into meltdown. Sounds like a good time to take a holiday.

Well the fortunes of the pound are not so easy to predict at the moment, and the amount you will get for your holiday spends, overseas property purchase or any other foreign exchange transactions, will clearly be affected.

Many people are jetting off to the Continent this summer, and many of my clients have asked why it is that sterling has not strengthened against the euro in light of the well-documented crises in the region.

The answer is linked to how closely our own economy is tied to the Eurozone. We may not be a member of the single currency but our trade is so closely linked to it that sterling has been suffering peripheral damage throughout. The well-documented problems in Greece, Spain, Italy and beyond are not set to go away anytime soon - but the UK has its own economic difficulties to negotiate.

The Bank of England's decision to slash its growth forecast comes on the back of a string of substandard performance data from all sectors. If anything, this decision highlights the lack of clarity everyone has about what is going to happen as we continue to stumble out of this recession.

That said, we have seen some small gains for the pound in the past few weeks. This means you might get a few more euros for your pounds if you are one of the thousands of people looking to take a holiday in Europe over the next few weeks.

However, if you are buying a property, or moving a large amount of money overseas for something other than holiday spends, the long term picture is far tougher to predict.

There are ways of protecting yourself against exposure to volatile exchange rates. It all depends on what you are looking to do and when. By using the right kind of hedging products it is possible to set a worst-case scenario rate in advance, whilst still ensuring you will see the upside if the markets move in your favour.

No-one has a crystal ball, and even for those of us who watch the markets every day, there is no real indication of how all this instability will influence the rates as we move forward. All that is certain is that taking a strategic approach to your international payments might be a very good idea right now. Planning ahead might mean that you minimise your chances of losing out a little further down the line.

Ben Mitchell is an international currency specialist at foreign exchange brokers, World First.

Last updated: 10:17am, August 18 2011