It has been a year of ups and downs for sterling, largely dominated by political and geopolitical factors. Investors’ concern over the outcome of Brexit largely overshadowed other factors. Despite celebrating its 20th anniversary in 2019, it wasn’t a banner year for the euro. Over the last 20 years, the euro has strengthened by 27 per cent against the pound, with nearly half of those gains being made following the UK’s referendum result to leave the EU. However, it is 3.5 per cent lower against the US dollar over the last two decades and the global slowdown, its impact on Europe and international trade tensions piled on the pressure. The ongoing strength of the US dollar was sometimes counterintuitive; the market appeared to largely ignore economic performance and political turmoil, focusing more on the US-China trade war which dragged on despite multiple promises for a resolution and left investors moving to the US dollar along with the yen as a safe haven currency.
Sterling battles Brexit
The pound’s major challenge this year was Brexit. Sterling began the first working day of 2019 an average of 0.8 per cent above levels on Christmas Eve, but as parliament returned from recess and the Brexit debate was renewed, the pressure returned to the pound. The pound was given a boost when Boris Johnson was appointed as the new leader and de facto Prime Minister. Alongside the political developments and negotiations, the pound fluctuated in line with any indications as to the outcome. Optimistic comments about the feasibility of Brexit from European Commission President Jean-Claude Juncker gave the pound a boost in September, and news of “detailed and constructive” talks between the Prime Minister and Irish premier Leo Varadkar helped the pound take an average of 2.7 per cent higher against the other major currencies. By November, the pound had run out of steam and the market braced for a General Election.
International trade and the impact of geopolitical developments
The downturn in Europe was mirrored across the globe; weaker than expected economic results from China in April pushed the euro lower as the impact of the US-China trade war was seen. The euro fell after the news because of the knock-on effect for Europe’s economy because stocks for basic resources have a heavy exposure to China. In October, Europe appeared to shrug off US plans to impose tariffs on a range of EU goods but the global impact of the US-China trade war could not be ignored. While the pound was weighed down by political stasis, Europe faced a different challenge with numerous elections across Europe and results which reflected the air of uncertainty. By the end of the year, the European Central Bank had announced a new QE stimulus package and incoming President Christine Lagarde used her maiden speech to call for “strength, resolve and courage” in European capitals.
Uncertainty in the USA
In 2019, the American economy appeared to lose some of its sparkle. In general, the market appeared unperturbed by the numbers and the US dollar was not unduly influenced by the monthly or quarterly results, perhaps because the picture was often mixed. However, January’s balance of trade figures did have an impact on the US dollar. The deficit shrank by 15 per cent, largely due to panic-buying at the end of 2018 to beat tariffs. The repeated promises and dashed hopes of a deal with China throughout the year put pressure on the currency at various points through the year. In the long term, investors see tariffs exerting an upward pressure on inflation and interest rates and potentially downward pressure on the US economy. Convention dictates that the US president should refrain from commenting on the actions of the Fed, but President Trump proved himself unconventional for another year with repeated criticisms of its actions or what he saw as a failure to act. The ongoing calls from the Fed for patience throughout the year appeared to go unheeded. A second rate cut in November didn’t have the positive effect of the first because the hawkish tone of the accompanying statement pushed the dollar lower against a basket of currencies. For the most part, the market ignored domestic political developments, not even the impeachment vote could raise more than light volatility, although its possible the market is bracing for more turmoil next year with the 2020 Presidential election on the horizon.
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Adam Jordan: I joined moneycorp in 2004 and have more than 15 years’ experience in the foreign exchange market, primarily providing support and guidance for a large portfolio of private clients. I have developed long-term relationships with a significant number high net-worth clients, helping them manage their foreign exchange risk on a daily basis with expert guidance and market commentary.
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