We live in turbulent times and it’s no wonder that currency markets are deeply affected by the global economic crisis. Even the Pound Sterling (GBP), which used to be one of the most stable currencies, has become volatile. Many factors affect it and that’s why the matter won’t be resolved easily.
This means that every business owner, investor, and even regular UK residents need to start thinking about how to protect themselves. Some might want to use this as an opportunity to become forex traders as volatile times can be lucrative. Others might want to minimize risks to their capital.
Remember, you don’t have to run an international business or live engrossed in day trading books to be worried about foreign currency exchange rates. Even if you plan to buy a property or invest abroad you will be affected by GBP volatility. And it might cause great losses if you aren’t careful. Therefore, you should use specialized tools, like hedging, to minimize the risks.
Why GBP Volatility Is Unavoidable in the Future
In March this year, the Pound Sterling has dropped to its 30-year lowest point on the forex market. This particular plunge was caused by the panic surrounding the coronavirus pandemic. However, there are many other factors affecting the GBP exchange rate. Unfortunately, all of them indicate that there won’t be stability in the Pound’s near future.
The main reason for this is that no currency can be stable when the country is plagued by uncertainty on multiple levels. And this is exactly what’s happening with the UK, and most of the world right now.
One factor is the pandemic, which has shaken and ultimately reshaped the world. While vaccine development is showing promise, even if the pandemic stops right this second, the damage is already done. Lockdowns affected a great number of manufacturers and the results of production delays will be felt for years to come.
There is also the global economic recession to consider. This one is predicted to be one of the worst in human history. Again, this is feeding the uncertainty, which caused the GBP exchange rate to be volatile.
GBP used to be a currency that many FX investors saw as a “safe haven” during times of economic upheaval. However, this time this isn’t the case because the Pound is at its most volatile wince World War 2. The deficit and Central Bank policies all revolving around the pandemic are a big part of the cause. However, one also cannot forget the matter of Brexit.
It was the announcement of Brexit back in 2016 that caused the seemingly unshakeable Pound to plunge drastically. The currency has recovered since, but it hasn’t reached the pre-Brexit referendum levels before this latest disaster struck.
Brexit alone was breeding enough uncertainty to make the Pound quite volatile. However, paired with the pandemic and a huge global economic crisis, the situation is very difficult. No one can be certain of anything right now, not in politics and not in economy. Thus, it’s not surprising that currency exchange rates are also volatile.
The global macroeconomic and even political situations also matter for the stability of GBP. That’s because the UK trade partners all matter for our own economic stability. But countries all over the world are just as deeply affected by the current crisis.
However, one shouldn’t forget that times like this also present a good opportunity for investment, especially abroad. But they also increase the risks of such ventures. Therefore, using tools to reduce those risks can be a great help for those with ambitions to grow their capital in spite of the crisis.
How to Protect Yourself from FX Volatility Right Now
The outlook for the future might be grim. However, it’s not impossible to protect yourself and your assets. Fintech is doing wonders for the world of forex these days. One of them is making hedging a tool available to everyone.
As any of the best forex trading books will explain; hedging is a way for minimizing currency risk through the use of specialized tools, like forward contracts. Each of these tools offers a specific type of protection. For example, forward contracts and options allow you to exchange currency in the future at a set rate, regardless of the actual FX rate.
The most important benefit of fintech development is that it makes sophisticated financial services easily accessible. Hedging is a prime example of that. It’s because when it was only offered by banks, it was available to their top corporate clients. However, today this service is offered to anyone by most of the best money transfer companies in UK. These companies can be used by private investors and even regular travellers. And as many of them offer hedging tools, each customer using the service can access those to mitigate their personal currency risks.
You might believe that it’s only businesses and investors that need this type of service. And it’s true that their currency risk exposure is high because they need to make and/or receive international payments regularly. However, there are many other situations when hedging services and cheaper money transfers can benefit almost everyone, for example:
- Purchasing real estate abroad (the service will be most helpful for those making regular mortgage payments)
- Paying for or receiving money for freelance services
- Sending transfers to loved ones abroad
- Pension and other regular money transfers for expats
Remember that money transfer companies do not only allow you access to hedging. They also offer much cheaper services compared to bank wire transfers. Depending on the situation, a transaction through one of these companies can cost you less than 1% of the transfer amount.
Bottom Line: Hard Times Ahead, So You Better Prepare
The current economic situation is complicated and experts predict that the Pound will continue to weaken in 2021. Even in case of a favourable Brexit trade deal, there may be no stopping the GBP decline for a while. Therefore, it’s essential to think about reducing currency risks for yourself. Whether you are an investor, a business owner, or a person who plans to travel or even move abroad, the Pound’s fluctuations in exchange rates will affect you.
Using the services of money transfer companies can reduce the negative impact of volatility. They are easy to access and use, so there is no reason for you not to use the benefits they offer.