Let us travel back in time, to the start of 1973. Edward Heath was Prime Minister, Liverpool was on course to win the old First Division, Little Jimmy Osmond was at number one – and the pound was trading at $2.55 against the US dollar.
Over the course of the year, it fell by nearly 8% and ended in 1973 at $2.33. It trended steadily downwards throughout the rest of the 20th Century and at the turn of the millennium, stood at $1.63. In 2007, its average level was up to $2, but since then it has seen another period of gradual decline, with the pound trading at $1.35 at the start of this year.
The pound continued to fall throughout 2022, and at the beginning of September was trading at $1.16.
On Friday 23rd September, new Chancellor Kwasi Kwarteng presented his ‘fiscal event’ (or mini-Budget).
His statement was full of tax cuts: crucially, there were not the usual economic forecasts from the Office for Budget Responsibility (OBR). The currency markets took fright, and the pound fell spectacularly. At one point, it was perilously close to parity with the dollar, trading at $1.03.
With the Chancellor promising to bring forward his ‘medium-term economic forecasts’ and, with the OBR now set to report, the pound then recovered much of the lost ground. At the time this article was written – on the afternoon of Friday, October 7th – the pound was trading at $1.1133.
So has the pound stabilised? Have we seen the last of its troubles? After all, let’s remember that it is far from the only currency to fall in value against the dollar, as the US Federal Reserve continues raising interest rates.
The answer is ‘no.’
Markets will always fluctuate, whether it is stock markets, currency markets or the price of commodities. For example, the pound slipped back in the first week of October when the credit ratings agency Fitch downgraded UK government debt.
They lowered their rating from ‘stable’ to ‘negative,’ arguing that recent action could lead to “a significant increase in fiscal deficits over the medium term”.
While Fitch retained its AA- credit rating for the UK, the negative sentiment followed a similar report from Standard & Poor’s (another ratings agency) after the mini-Budget.
Doubtless the soon-to-be-published information from the OBR – be it favourable or unfavourable – will have a similar effect on market sentiment.
The pound’s trading against the dollar – and any other currency – will continue to fluctuate, as all markets do.
These markets will continue to be traded – sometimes successfully, sometimes unsuccessfully. But that is for the professionals.
The answer for the rest of us, which includes most of our clients, is to have a robust, stable and balanced financial plan, that matches your risk profile and does not leave you over-exposed to any particular asset class.
Our financial advisers have a wealth of experience and an absolute commitment to looking after your very best interests in the long term and will make sure you have a balanced financial plan in place. Get in touch today.