Great start to 2023 – Sterling Summer Fade Again????

Sterling has had a good run in 2023 and benefitted from the increase in the Bank of England interest
rates – making the Pound more attractive to investors looking to hold currency as a yield play. The
UK unit became the target for carry trades I.e. borrowing a currency at low interest rates and
investing in a higher-yielding currency to make a return. The resulting purchases of GBP have lifted
demand and therefore increased the value of the currency.
However, more recently we are starting to see the customary “Summer fade” that we have
experienced over the past five years. Ironically the same reason for the GBP increase in value – the
interest rates increasing – is the reason the markets are turning against the currency as concerns
around the medium/long term impact of the rate hikes on the economy. The talk of recession has
started again, with retail sales and dropping in real terms and inflation staying stubbornly high.

In the short/medium term the high rates will support the Pound, however, caution should be
exercised as the impact of the higher rates unfolds on the UK economy.

2023 has been a year of reversal in the fortunes of the US currency – the inflation rate in the United
States reacted well to the increase in interest rates and the need to hold the traditional safe haven
waned due to concerns around hard-landings/recession around the globe fading away.
Demand for the world’s most liquid currency can be linked to many things, but some of the main
contributors will be risk aversion holdings, purchasing Dollar denominated goods (Oil and gas for
example) and the fact that the currency has been the higher yielding of the major currencies.
Therefore as global risk appetite has changed so major institutions, foreign governments and traders
have offloaded large amounts of the currency to re-balance their currency holdings, oil prices have
dropped as the world has become accustomed to the conflict in Ukraine – again dropping the
demand to buy USD’s.

This adjustment looks to have now run its course and the world’s most liquid currency is back to a
more neutral territory until the next big market theme – possibly global growth concerns coming out
of China and alike.

The Euro has enjoyed being out of the limelight recently – as the weaker Dollar and yield driven
Pound has been soaking up the market’s attention. The single currency has held it’s own against
most major currencies as some demand has emerged to diversify away from the USD and into a now
positive yielding Euro.
This does not however mean the market is not aware of the implications on the European
economies of higher cost of capital since rates moved from negative to positive in a very short
period of time.
Inflation remains an issue in Europe and the ECB have made it clear they will do whatever it takes for
as long as it takes to bring it back under control.
As long as this outlook remains, the Euro should continue to hold it’s own in the short/medium term
and especially while the higher cost of gas from Ukraine/Russia is not an impact during the summer

Who are XE?
XE form part of Euronet Worldwide | NASDAQ EEFT. Last year XE remitted over $9bn of payments on
behalf of its corporate & consumer clients, dealing with over 75,000 payments per month.
XE have a remit to reduce their client’s cost & mitigate the risk associated with dealing with foreign
currency, be that through simple rate regulation or high-level currency risk management strategies.

Jonathan Gurr | Senior Corporate FX Consultant

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