What Affects Exchange Rates? Things Every Expat Should Know

by Simon Hilton, senior foreign exchange consultant at World First and official Expat Focus foreign exchange partner

It’s been quite a start to Mark Carney’s stewardship of the Bank of England. Having only succeeded Sir Mervyn King as Governor on 1st July, he’s wasted no time in making his mark, announcing an unprecedented plan of forward guidance on interest rates. This means that the Bank would be unlikely to raise the historically low 0.5% interest rate until unemployment falls to 7%, something which could take over three years. The thinking is that investors will take confidence from knowing that the rate will stay low for some time, and by encouraging them to invest and rather than sit on their money, this will help stimulate the economy.The interest rate is just one of the things that affect exchange rates – the value of one currency in relation to another. If you’re working abroad and sending money home, retiring overseas and transferring your pension, or making any sort of currency transfer, the interest rate will have some bearing on much your money will be worth in another currency. When interest rates are low, inflation usually follows, as borrowing and spending are encouraged. And if the UK interest rate is low compared to other countries, it makes the UK less attractive to foreign investors looking for the best possible return on their investments. As such, the demand for sterling is lessened, and exchange rates are likely to fall. High inflation also causes a country to be less internationally competitive, as prices for goods increase and potential investors go elsewhere. Exports decrease, and the reduced demand for sterling pushes its value down. Other factors which determine exchange rates are debt, speculation and political stability; anything that causes a change in the supply and demand for a country’s currency.

The UK has endured low interest rates and high inflation for some time now, and looking at some of the key currency pairs, we can see how the value of the pound has dropped. At the turn of the year, the GBPEUR rate was at 1.23; by the beginning of August it had fallen to 1.14. So, if you were changing £10,000, that’s a difference of about €800. Similarly, the GBPUSD rate at the turn of the year was 1.63, and at the start of August, was down at 1.52 – a difference of about $1000 when making a £10,000 transfer.

When transferring funds across currencies to complete the sale or purchase of a property, the way you handle your transfer will make a big difference to how far your money will go. Spain and the US remain the most popular destination for UK expats, and as the pound has lost a considerable amount of its value against the euro and the US dollar, protection from market fluctuations like the ones we’ve seen this year could mean a saving of thousands of pounds.

These issues affect many of our clients, but as the UK’s fastest-growing foreign exchange broker we always aim to provide the best possible exchange rates. You can also keep up to date with the very latest market updates and rate alert services from our chief economist, Jeremy Cook.

Simon Hilton is a senior foreign exchange consultant at World First specialising in assisting private clients and companies with their foreign exchange transactions. Simon is authorised by the FSA to offer foreign currency options. Contact Simon today for a free, no-obligation currency transfer quote.

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World First transacted over £4.7bn for their 40,000 clients in 2012 and have a 2A1 credit rating from Dun & Bradstreet – the highest possible rating for a company their size. As well as tailored hedging solutions designed to protect you from adverse market movements, they also offer excellent service. Winner of the Client Focus Award at the 2012 National Business Awards, they provide personal service with a dedicated dealer, and a regular transfer service, which is perfect for mortgage or rental payments.


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