It looks like bad news for everyone that was celebrating the Pound’s Rise Against the Dollar in March as GBP has slumped to its lowest level against the Euro in one and a half months.
What has caused the drop?
There appear to be several reasons behind the drop in the value of the pound. The first being the inflation rate rise, the second being the slowdown in UK wage growth and the French and UK general elections have also added uncertainty to the market. Wherever there is any uncertainty you can expect market volatility.
Inflation on the Rise
According to the Office for National Statistics (ONS) the Consumer Price Index (CPI) has reported a growth in inflation of 2.7%, up from 2.3% in March. Inflation occurs when there is a sustained increase in the general level of prices for goods and services meaning that effectively your money has less value as it has less purchasing power. There was a big surge in oil prices yesterday and typically, fuel prices have a big effect on the rate of inflation. If fuel prices are high, the cost of transporting goods rises which in turn, leads to higher prices.
Slow Growth in UK Wages
Although UK unemployment levels have dropped to 4.6%, their lowest in 42 years, (which is obviously great news), UK wages only increased by an average of 2.1% in Q1 of 2017. It is the first time that wage growth has lagged behind inflation growth in over 3 years. This will almost certainly have had an impact on the pound’s value as us Brits now have less spending power abroad.
Bank of England Interest Rate Freeze
The slight positive for those of us with mortgages is that the Bank of England has appeared to rule out any interest rate change ahead of the general elections on June 8th. This means that our monthly payments should remain stable for a while longer. Having said that, anyone fortunate enough to have savings still has to wait for a while longer before they receive any interest of note on these.
Impact of UK General Elections on GBP
Historically in the run up to a UK general election, the GBP has always seen some volatility. Any period of uncertainty in a country will make investors nervous and less likely to trade. Previously the pound has strengthened against the Euro ahead of elections and then dropped afterwards. Interestingly it has behaved in an opposite fashion against the dollar, dropping before the elections and then recovering in the proceeding months.
When Theresa May announced the UK general election in April, the pound reacted positively, however the impact of the French elections weakened the GBP/EUR rates and now we are lower than before the election announcement. Hopefully post-election we will start to see signs of recovery but for the next three weeks expect continued market volatility. For those of you going abroad this summer, it may well be worth holding off on purchasing your foreign currency until after the elections are over when hopefully things will start to rise.