The United Kingdom has outstripped other major world economies when it comes to the vaccination rollout and the Bank of England seems to have delayed the potential for negative interest rates, boosting the market’s demand to buy Sterling. However, there is more to consider than just these two obvious factors.

The Pound, at a glance

What’s impacting the Pound right now?

• The Bank of England stated it expects the UK Economy to “recover rapidly” once out of lockdown.

• UK consumers have built up around a whopping £154B in savings—signifying pent-up demand when the economy is back open for business.

• COVID-19 cases are dropping, and vaccinations are increasing.

• Governor Bailey appears to be ready to buy bonds in stimulus.

• The furlough scheme does appear to be capping unemployment rates.

These points allude to the potential for a U-shape recovery out of the COVID-19 pandemic recession for the UK.

Compare to the sharp fall experienced at the outbreak of the virus, where we saw the UK economy drop a whopping 20%, which was then followed by a period of flat or marginal changes and ultimately a sharp increase in economic growth.

The Pound, in review

Looking back in recent history, the Sterling Index shows the incredibly negative impact the EU referendum result had on the value of the Pound against a basket of currencies since 2016.

GBP to USD, 2011-2021

GBP to Euro, 2011-2021

The currency has not recovered to pre-referendum levels against its major counterparts. The sheer uncertainty and political instability in the United Kingdom has been the constant “grey cloud” hanging over the Pound. Accordingly, the number of short positions on the Pound and lack of desire to hold Sterling in a portfolio of currencies has left it out in the cold.

In March and April of 2020 this lack of desire to hold Sterling was amplified when the world’s risk propensity changed and investors and traders alike sold out of anything considered risky—be it the Pound, stocks or even gold—and into the traditional tried and tested safe haven of the US dollar. Sterling traded at its lowest levels since 1985 against the dollar and worst level against the euro since the financial crisis in 2008.

Asset allocation of portfolios added to this sale of GBP as investors sold traditional stocks listed on the London Stock Exchange and bought the tech stocks listed in the US during the initial phases of the pandemic.

However, markets again proved that they can get used to, or price in anything over time, and with lockdowns being eased the Pound stabilised and recovered some of the ground it had lost during the panic buying of US dollars.

The next major event risk was the Brexit deadline of the 31st December 2020, which Prime Minister Boris Johnson promised to deliver and refused to extend. This hampered any upward movement for the Pound and still hamstrings the currency today.

We did however see a Brexit deal agreed and a level of certainty arrive for the UK economy in the short term. Subsequently Sterling managed to make some gains against the euro and US dollar.

So, what has 2021 been like so far and what could happen next?

The markets want the answers to these major questions:

1. Will the economy open sooner due to the vaccination rollout out, and

2. Will this be before other global economies?

3. How long will it take before consumers start spending those savings stored up during 2020 to get the wheels of the economy turning again?

4. What will be required from the Monetary Policy Committee in terms of stimulus?

With new multi-year highs for GBP against the US dollar during the second week of February, it would seem markets believe, for now at least, that the UK can get going again and ahead of other economies. If the economy does start moving forward, will it be a “rapid recovery” like the Bank of England said it could be?

This has therefore pushed back the prospect of the Bank of England cutting interest rates to negative from May (some forecast) to August.

Things to watch out for and monitor in the near future:

• Changes or delays to the vaccination roll out program

• Effectiveness of the vaccinations to new variants/mutations of the COVID-19 virus

• End to, or extension of, the UK national lockdown

• The budget speech from Rishi Sunak on March the 3rd, specifically with regard to:

  • The health of the economy

  • Furlough scheme status/extension and its potential impact on unemployment

  • Tax rises to try and start paying for the pandemic relief

The Pound, in summary

The Pound has started stepping out of the shadows of the Brexit uncertainty and looks to be riding the wave of the vaccination rollout. However, there are a number of potential dangers to this, be it final Brexit deal negotiations on financial services or longer lockdowns due to new variants to the virus.

It could be a good opportunity for Sterling sellers currently and would seem prudent to take advantage of this for short-term committed exposures you face in foreign currency.

Who’s in charge of setting currency exchange rates? If you’ve ever sent money overseas or checked the rates, this is a question that may have definitely crossed your mind. Who decides what is the value of money, and why do rates fluctuate that much during the day?

It’s normal to wonder, and fortunately for you, we’ve got the answers to those questions and more.

How do currency exchange rates work?

Every country in the world has its own currency, and each of these currencies is valued differently. When you exchange one currency for another, you’re actually buying money, just in a different currency than the one used in your country.

The exchange rate tells you how much the currency used in your country is worth in foreign currency. The rates constantly change for some countries, whereas others use fixed exchange rates. As a rule of thumb, a country’s social and economic outlook is the main factor that influences the currency exchange rate.

That’s the quick answer. If you’re in the mood for a more in-depth look, check out our previous blog post.

What are the main types of exchange rates?

The main types of rates are variable (or flexible) and fixed rates.

Most countries have variable currency exchange rates, which are determined by the foreign exchange market. Because these rates are flexible, they fluctuate every minute, often influenced by market movements, political events, economic forecasts, and more.

Countries such as the U.S., the United Kingdom, Canada, Japan, and Mexico all use flexible exchange rates. It’s important to note that even though government policies can influence currency exchange rates, the government can’t actually regulate them. The rates are always determined by Forex traders on the foreign exchange market.

Several countries use fixed currency rates, and that is because the government dictates when the rates change. This is the case for the Saudi Arabian riyal, for example. The fixed rates are pegged to the U.S. dollar, and the central bank in the countries that use this system holds U.S. dollars to keep the rate fixed.

How do forex traders establish currency exchange rates?

The market forces of supply and demand are the main factors that determine currency exchange rates. The level of demand for a currency determines its value in relationship with other currencies. For example, if the demand for British pounds by Americans increases, the supply-demand forces will cause an increase of the British pound’s price in relation to the dollar.

The exchange rates between two countries are affected by countless factors, both geopolitical and economic. Some of the most common of them include:

• Inflation reports

• Interest rate changes

• Gross domestic product numbers

• Unemployment rates.

Forex traders take all these factors and more into account when establishing currency exchange rates. If a country has a strong economy that’s growing, investors will be interested in buying its goods and services, which means that they’ll need more of its currency.

On the other hand, when a country has an unstable economy, investors will be put off and less willing to invest, which means that the currency will not be highly valued. Investors always want to make sure they will get paid back before deciding to hold government bonds in a particular currency.

How do exchange rates affect you?

The value of money affects every individual on a daily basis, as the prices of essentials such as groceries and gas at the pump are correlated to it. When the value of money declines steadily over time, it causes inflation, and the result of that is a price increase for everything, including basic goods.

If you’re traveling or making a payment to another country that uses a different currency, it’s important to check for exchange rate values and plan your finances accordingly. Many people check whether the currency of the country of their destination is strong or weak before booking a vacation. That’s because a weak currency in the destination country means that you can buy more of it with your own currency, so you have more money to spend on your trip.

How can you get the best rates when sending money overseas?

As we’ve said before, unfortunately there’s no specific time where you can guarantee you’ll get a great rate. But there are a few things you can do to help yourself out.

If you’re transferring money to someone in another country, you need to look carefully at your options, as some transfer methods are more expensive than others. For example, if you’re using your bank to make a transfer, you’ll often need to pay a fee on top of the exchange rates set by the bank, which are usually disadvantageous.

By using an online money transfer service such as Xe, you can save money on fees and get great exchange rates. Your money will also reach its destination faster, and the entire process of making the transfer is easy both on the website and the mobile app.

Finding opportunities to turn prospects into Xe customers can be difficult. Though some people do have plans to transfer money overseas and may be in search of the right provider to facilitate their transfers, many other people as, and some may be perfectly satisfied using their bank or a wire transfer to send their money overseas. There are a few things that you can bring up in your discussions or keep your eyes (and ears) open for in order to make the search a little easier. Let’s talk about how you can find the right opportunities.

Spotting a potential opportunity

Though everyone is different, there are a few signs and behavioral patterns that can indicate someone who would be a good fit to transfer money with Xe.

There’s one question that reigns above all others: do they make international payments? This is the fundamental question, and the first one you should look to answer. Do they make international payments or deal with foreign currencies in any capacity? Then they are someone who could benefit from a fast, cost-effective, and easy-to-use money transfer solution.

Signs of a potential opportunity: individual edition

Individuals and businesses will have different signs, and different uses for money transfer. Some examples of people who fit this category include:

• Clients living in other countries

• Business people with clients who live overseas

• Expats from another country

• People who own property in another country

• People who work with or get paid by a company in another country

• People who have family overseas

• People who have shares or dividends coming from another country

• People receiving an inheritance, gift payments, or other sums of money from overseas

• Individuals selling property with plans to relocate abroad

• People purchasing goods from overseas

• Workers on temporary overseas work secondments

• People with overseas pensions

• Account holders of multi-currency bank accounts.

Identifying someone who has a need for international money transfer is the first step. The next step is convincing them that they shouldn’t just use their local bank branch or the first provider they come across: they should use Xe.

There are two key areas to focus on:

• Exchange rates

• Bank costs associated with international payments.

Banks and other providers often set rates that favor themselves, not the client. In addition, these institutions often come with numerous additional fees (sometimes even hidden within the transaction). On the other hand, the Xe rate comes straight from the live currency markets, and is a true, honest reflection of the mid-market rate, with no hidden margins. In addition, there are no hidden fees with Xe: what your client sees is what they will get.

Signs of a potential business opportunity

Individuals aren’t the only ones who need money transfer; there are plenty of businesses who could benefit from working with Xe. Some examples of good opportunities include:

• Clients with overseas offices

• Businesses with a globally-located workforce

• Managers of international payroll

• Businesses that import or export

• Offshore investors

• Businesses with multi-currency bank accounts

• Any business that sends and/or receives international payments.

Within the realm of international payments, there are a few common concerns that could be worth discussing further. Consider discussing:

• Do they bill clients in your local currency or their local currency?

• Do they talk about increased costs overseas, or decreased profits on exports?

• Are they concerned with the bank costs associated with making international payments?

These questions can help you to better understand what they’re looking for from a money transfer and FX provider, whether it’s improving their profits, cutting out unnecessary costs, or ensuring that they aren’t exposed to FX risk when they make their international payments.