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A country’s foreign exchange rate is one of the most critical ways in which its economic health is judged, partly why it is so regularly scrutinised and re-evaluated.
For you, it’s important to be aware of changes in the exchange rate and factors that may influence it, as this will directly impact how much you will get for your money and when you should be doing your foreign currency transfers.
2019 is set to be a turbulent year in the UK political and economic spheres. Here are some of the factors that are likely to impact the exchange rate in 2019.
This one should come as no surprise. The clock is ticking down to the 29th March and the UK’s official leave date from the EU, with no evidence we are coming much closer to a final agreement. The pendulum is swinging between May’s deal and the threat of a no-deal, and there is still a significant amount of uncertainty about the fate of Brexit, which only increases uncertainty around the fate of the pound. Brexit has thrown the pound into chaos in the last few years, and we’d say expect more of the same. We could see the pound drop immensely in the coming months, so be prepared.
Terms of Trade
Tariffs and trade wars such as the ongoing one between the US and China significantly affect exchange rates. A country’s terms of trade improves if its export prices are greater than its import prices; this naturally impacts currency values and the exchange rate. Many of the US tariffs that have been sanctioned against China also apply to the rest of the world, including some EU countries. For example, the US steel tariff applies to every nation bar South Korea, Argentina, Australia and Brazil. This has led to retaliatory sanctions imposed by the EU on the US, on around $3 billion products.
Political Stability & Elections
A country’s political situation can impact its currency strength and competitiveness in regards to other nations. Naturally, a country with a stable government and limited chances of political turmoil is more attractive to foreign investment. In turn, an increase in foreign capital causes an increase in the value of domestic currency. There are a number of important elections in 2019, in both the UK and wider EU. These could have quite an impact on the pound to euro exchange rate, amongst others. In particular, there are concerns about the EU elections and the potential for more extreme parties to come into power. UK local elections will be held in May.
Changes in interest rates impact currency values and exchange rates. An inflation in interest rates increases a currency’s value, as higher interest rates provide higher lending rates and thus attract more foreign capital, causing an increase in exchange rate.
Both the Bank of England and the European Central Bank are set to see new key members and various other changes in 2019. The Governor of the BOE is expected to step down in July and it is yet to be confirmed who will be replacing him. The President of the ECB will also step down this year. The new appointees may instill changes to interest rates or the like that will impact the exchange rate in 2019.