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The British pound crisis – what you need to know

Global currencies are experiencing extreme volatility so we asked the experts for their views on the unfolding situation and how it impacts Australians.

On 27 September 2022 the British pound plunged to its lowest level since the 1980s against the US dollar. The dramatic fall sparked fears of a financial crisis and prompted the UK government and the Bank of England to step in with emergency measures.

The pound has since recovered but the ongoing volatility in foreign exchange markets could be here to stay, with some industry players saying the currency swings are the biggest they've ever seen.

To get a better picture, we spoke to 5 leading economists about what's causing the ongoing volatility and how it might impact you.

Why did the pound crash?

The British government released a surprise "mini-budget" that included major tax cuts to businesses and high income earners, reductions in levies and the removal of a cap on bankers' bonuses.

The move was aimed at helping to offset a potential recession caused by COVID-19 and rising interest rates, but forex traders saw the move as likely to make already rampant inflation (9.9%), as well as government debts, even worse.

Check out our 60-second explainer

If inflation does creep up, it could prompt the Bank of England to more aggressively raise interest rates than had previously predicted, leaving the British economy back where it started – on the verge of a recession.

The uncertainty in the market saw the forex market selling off pounds and heading into the US dollar, considered a safe haven currency during economic turbulence.

The pound has since recovered after the British government reversed some of its plans – notably the removal of the 45% tax rate for high income earners – but it remains at historically low levels.

Financial markets are fearful that the mini-budget measures will further stoke inflation, forcing the Bank of England to raise interest rates further than previously expected.

How does it impact Australians?

We put this question to several economists. It depends on your circumstances but the general consensus was that most everyday Australians would feel very little immediate effect.

You're most likely to see an impact from currency volatility if you regularly send money abroad, purchase stuff from overseas or are an active investor. For instance, you may notice a difference if you:

Businesses that deal with customers or goods in the United Kingdom, the United States or other markets will also be impacted to some degree. The UK is Australia's fifth largest trading partner with Australian exports worth $21 billion in 2019–20.

Apart from the sense of crisis that it added globally, the GBP crisis is unlikely to have a major impact on Australia. We are not about to go down the same potentially inflationary policy path so its not really an issue for Australia.

Shane Oliver

Shane Oliver
Chief economist, AMP

How are money transfers impacted?

People living abroad that send money back home to the UK could notice their currency is getting more or less bang for buck.

This is because when you send money overseas, the value of your converted currency is at the whim of the global forex markets. For instance, if you'd transferred $1000 to the UK in the first week of October 2022, you'd receive about £575 at the other end. But if you'd made that same transfer a couple of weeks prior (before the crash), you'd instead get around £600.

For a British person living in Australia for instance that needs to send mortgage repayments back home, a lower pound means they'll need to send more Aussie dollars to make up the difference.

The larger your cash deposit the more you're liable to lose or gain depending on what's happening in the market.

If you're looking to get the best deal for your next money transfer, you can compare services in our international money comparison table.

How are investors impacted?

Global currency fluctuations impact every type of investment at some level.

Typically, higher volatility results in more buying and selling activity by traders. Although risky, the unprecedented turbulence seen this year can actually be good news for experienced forex traders who look to profit from bigger price swings. Some hedge fund managers have reported to Reuters that the current high volatility is the "opportunity of a lifetime".

Stock market investors will also see a knock-on effect from forex movements. When currencies become too weak against the US dollar, central banks may be forced to step in by raising interest rates. And when interest rates go up, stocks tend to fall.

The UK stock market (FTSE 100) fell as much as 2% following the pound crash and, although it has since recovered, is still around 6% lower than its peak from a few weeks prior.

Public companies that rely on exports or imports could also see their stock prices moving depending on the weakness or strength of the local currency.

Are there opportunities to make money?

Yes, in fact experienced forex traders make a living out of trying to predict currency fluctuations.

But even if you're not a day trader, you can save yourself some money by keeping a close eye on currencies and locking in good rates.

For instance, if you were planning a trip to the UK, you could purchase British pounds ahead of your trip while the rate is still low. Using a travel money card is one option if you're looking to top up on global currencies depending on exchange rates.

Some money transfer services even let you set a limit order where a currency buy or sell order will only go through if the exchange rate falls within a certain desirable range. This is useful if you need to send money regularly overseas or have flexibility on when it needs to arrive. By setting a limit order, you can make sure you get the best available exchange deal within the timeframe you need to get it there.

What happens next?

While the falling pound was the headline, the bigger story is around the strengthening US dollar.

The US dollar has been on a bull run for the better part of the last 12 months, hitting fresh 20-year highs in recent weeks. When the US dollar is strong, it means that other global currencies such as the pound and the Aussie dollar are comparatively weak.

To support the strength of local currencies against the US dollar, central banks are forced to continue raising interest rates. Traders are now betting on the UK central bank to hike interest rates by at least 150 basis points at its next meeting on 3 November.

However, similar to share markets, global currencies are incredibly unpredictable. Of the 5 experts we put this question to, each had different views on what could occur over the next 12 months.

The US dollar is getting very overvalued so at some point in the next 6–12 months it should start to decline as global uncertainty recedes a bit. This should benefit both the GBP and the Aussie dollar but there is a way to go yet to get to that point.

Shane Oliver

Shane Oliver
Chief economist, AMP

Read more about the GBP and forex markets

Disclaimer: This information should not be interpreted as an endorsement of futures, stocks, ETFs, CFDs, options or any specific provider, service or offering. It should not be relied upon as investment advice or construed as providing recommendations of any kind. Futures, stocks, ETFs and options trading involves substantial risk of loss and therefore are not appropriate for all investors. Trading CFDs and forex on leverage comes with a higher risk of losing money rapidly. Past performance is not an indication of future results. Consider your own circumstances, and obtain your own advice, before making any trades. Read the Product Disclosure Statement (PDS) and Target Market Determination (TMD) for the product on the provider's website.

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