Pound Sterling Volatility Hits Overseas Property Buyers and Unhedged Corporates

A recent shake-up in global foreign exchange markets has seen the pound fall sharply against the euro.

"Anyone buying an overseas property should be prepared for changes in the rate at this volatile time and take this into account when budgeting."

In the ‘morning after’ we consider the implications for corporates who import from Europe and potential expats looking to buy property in places like Spain and France.

Chris Towner, director of FX advisory services at HiFX, says when volatility in FX markets steps up, it is normally down to something unexpected happening.

The long-assumed dynamic of euro weakness and British pound strength is now in question as Towner notes:

“For too long now the market has been expecting the euro to weaken further, but it is the European economy now that looks to be recovering, helped by their more competitive currency.

“Three weeks ago GBP/EUR was dealing at 1.4350 and yesterday we saw GBP/EUR dip below 1.3500, 6% lower. As UK is a net importer from Europe this move is significant but there still appears to be a lethargy among UK corporates to hedge FX risk.

“This time last year GBP/EUR was dealing at 1.2500 and so current levels at 1.3600 still look attractive to buy euros; however UK corporates seem to be caught up in hope that this sterling uptrend will continue.

“UK corporates that import from Europe need to take note of the recent turnaround in fortunes before fear overtakes greed if sterling slips further.”

The bottom line? HEDGE your exposure to the euro at all times.

Spain and France: Property Buyers Get a Wake Up Call

Meanwhile, the price of property in Spain, France and other popular European destinations is edging up for British buyers thanks to the exchange rate creeping back in favour of the euro.

Anyone on the verge of purchasing in a Eurozone country should be extra vigilant when arranging their euro transfers to pay for their property.

“The euro has gained around four percent against sterling in less than a week and of course this change equates directly to a rise in the cost of euro-priced property for Brits with funds insterling,” said Elaine Ferguson, Head of the Resource Centre at OverseasGuidesCompany.com.

“Anyone who began their property hunt earlier in the year when an exchange rate of £1/€1.42, for example, was achievable, might be shocked by a Spanish or French property’s sterling cost today, with the rate at £1/€1.36. For a €200,000 property, the sterling difference is around £6,500,” says Ferguson.

Ferguson notes that as always, no single factor can be blamed for the swing in the exchange rate, but expectations that a Bank of England interest rate hike will come later than first anticipated, along with the resignation of the Greek prime minister and Greece’s securing of a third bail-out are deemed to have helped the euro steal value back against sterling in August.

“Uncertainty over the exchange rate in coming months remains, although some analysts expect the euro to remain bullish.

"Anyone buying an overseas property should be prepared for changes in the rate at this volatile time and take this into account when budgeting. For many, forward buying currency could be the most reassuring way to cover the costs of their property purchase in the Eurozone,” says Ferguson.

Markets Back to Normal, Euro Now Overvalued

The strong 4% Wall Street gains overnight and the more subdued 2% gain on the Shanghai bourses this morning has created a strong risk on tone. Nervousness remains and renewed losses are certainly possible, even likely, at some stage but the bias is now towards recovery.

The dollar has rallied hard on the improving sentiment: EUR/USD is back at 1.1350, after having touched 1.17 earlier this week

A second Fed member, Dudley, has now suggested that the market turmoil might delay rate hikes. Futures are still predicting a 24% probability of a move in September.

GBP has been under-performing on the back of the equity sell-off, where the large weight of financial services in the UK economy typically weighs at times like these.

“Despite this sell-off, we still think EUR/GBP is far too high at current levels (again UK hard data should hold up) and we still see value in returning to long GBP/SEK positions,” say analysts at ING.