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.
IF you’re feeling jealous of travellers jetting off to the States this week, just show them the exchange rate and watch their faces drop.
The pound is super weak right now. It fell sharply to $1.35 last week, a low point for the year, following the Bank of England’s decision not to raise interest rates. It’s struggled to make up ground since.
Typically, interest rates and currencies go hand in hand. The lower the rate, the less attractive the currency.
The problem here, however, wasn’t just the decision - there’s good reason to keep rates at 0.1% for now - but also the messaging around it. Strong hints that rates would rise to 0.25% failed to materialise, and subsequently destabilised markets.
In the absence of attractive interest rates, you might hope that a strong economy would keep investors confident in our currency and push its value up.
Here too, sterling struggles.
Figures published today show that Gross Domestic Product (GDP) picked up 0.6% over September. While that’s more than expected, overall output for the third quarter was up just 1.3%, below the Bank of England’s 1.5% forecast.
Moreover, some of the key drivers behind September’s growth may only provide temporary boosts. Healthcare was one, following an increase in face-to-face GP appointments, while lawyers benefitted from last-minute house purchases ahead of the return of stamp duty.
Worryingly, business activity remained well down on pre-pandemic levels, a sign that a sluggish recovery is weighing on confidence.
Brexit too has not been a friend to the pound, and reports that the UK may trigger the Article 16 safeguard clause to reverse Northern Ireland’s post-Brexit agreement are not helping mend the relationship.
What does all this mean for you?
Normally I wouldn’t get too worked up about currencies. I tend to think a globally diversified portfolio of holdings will see most fluctuations come out in the wash.
The problem here is that it’s hard to see how the pound gets out of this rut. Today’s GDP figures show Britain’s recovery lags those of other G7 nations, while the Brexit fallout will continue to murmur away in the background like a dog whining for attention.
Not only is this bad for the UK’s jetsetters, it’s also bad news for its importers, as foreign goods become more expensive to buy. Add that onto supply chain pressures and higher production costs, and this could be an expensive Christmas for UK companies and, by extension, consumers too.
One positive is that a weak pound is, ironically, good news for the UK’s largest companies. Around 75% of the revenues generated by FTSE 100 companies listed in London are made outside of the UK. A weak pound automatically boosts these overseas profits.
Moreover, there’s little doubt rates will eventually rise, perhaps as soon as next month. That’ll give sterling a shot in the arm but won’t cure it of its wider malaise.
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. 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 a Fidelity adviser or an authorised financial adviser of your choice.
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