Important information: The value of investments and the income from them can go down as well as up, so you may get back less than you invest.

Central banks administered a bitter pill to British holidaymakers last week, as their combined actions helped drive the pound down to around 1.20 against the dollar1. That’s the lowest the pound’s been since the start of the pandemic in 2020, ensuring the costs for foreign travellers will be high this summer.

A 0.75% rise in US interest rates on Wednesday followed by a much smaller 0.25% increase in the UK a day later added to the relative attractiveness of the dollar.

We should expect more in this vein. In its policy statement last week, the Federal Reserve clearly left the door open to another 0.75% rate rise next month.

Sterling has been on a downward path against both the dollar and the euro. Against the dollar, the pound has slipped from around 1.42 in just over a year2.

The Bank of England’s options look limited. It must combat rocketing inflation. However, given the UK economy’s dependence on consumer debt and the feel-good factor that comes from rising house prices, the Bank is understandably reluctant to follow a similar path to the Fed.

Average two-year fixed mortgage rates in the UK were 2.6% in May, up 1.2% on the same month in 20213.

For investors, the pound’s weakness is both bad and good. There’s the very pertinent question of how weaker UK businesses will now fare, as the costs of raw materials and intermediate goods and services in pounds see another rise.

The corollary to that is that the foreign earnings of UK companies – which are highly significant for the FTSE 100 and FTSE 250 – will be seeing a lift in sterling terms.

Sterling investors with holdings more aligned to world markets may have the most to gain. At the end of last month, the dollar denominated US stock market accounted for around 68% of the MSCI World Index4. This is neatly illustrated by the below data visualisation, which shows what a big slice of global markets the US stock market accounts for.

Where we go next will depend a great deal on expectations. It seems likely that markets have now discounted a large part of the pound-dollar interest rate differential that we’re plausibly going to see this year.

However, economic growth will also be important. Last week, the Bank of England said it thinks the UK economy will shrink by 0.3% this quarter, while the euro area and the US expand by 0.3% and 0.8% respectively5. If that keeps up, the pound is likely to remain under pressure.

The bottom line for investors is that currencies move around against each other over time in a largely unpredictable way that is costly to insure (hedge) against, so the best an investor can normally do is spread their investments across many of them.

The Fidelity Select 50 Balanced Fund shows the way. This fund spreads itself over 30 or so other funds and is diversified in terms of both asset type and currency. Alongside a 32% weighting in the UK, this fund currently has large positions in Europe (17%) the US (31%) Asia (7%) Japan (8%) and smaller holdings in Australasia, Canada and Africa.

1 Bloomberg, 20.06.22
2 Bloomberg, 20.06.22
3 House of Commons Library, 09.06.22
4 MSCI, 31.05.22
5 Bank of England, 16.06.22

Important information: Investors should note that the views expressed may no longer be current and may have already been acted upon. Overseas investments will be affected by movements in currency exchange rates. Fidelity Select 50 Balanced Fund uses financial derivative instruments for investment purposes, which may expose the fund to a higher degree of risk and can cause investments to experience larger than average price fluctuations. The fund can invest in bonds and there is a risk that the issuers of bonds may not be able to repay the money they have borrowed or make interest payments. When interest rates rise, bonds may fall in value. Rising interest rates may cause the value of your investment to fall. Currency hedging is used to substantially reduce the risk of losses from unfavourable exchange rate movements on holdings in currencies that differ from the dealing currency. Hedging also has the effect of limiting the potential for currency gains to be made. The Fidelity Select 50 Balanced Fund investment policy means it invests mainly in units in collective investment schemes. There are just a few fixed limits for the three core elements in the fund. These are 30% to 70% for shares, 20% to 60% for bonds and 0% to 20% for cash. This information is not a personal recommendation for any particular investment. If you are unsure about the suitability of an investment you should speak to one of Fidelity’s advisers or an authorised financial adviser of your choice.

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