At the start of 2021, even as infections mounted globally, a sense of confidence appeared to be returning. The battle lines had been drawn in the fight against COVID-19 after the first vaccination was administered in December 2020 – with headlines suggesting that the newly developed vaccines would provide 90% protection against the virus and life would return to normal by spring.
Fast-forward a few months, however, and reality had kicked in amid ongoing restrictions due to the unknown long-term risks of the pandemic. So, with the power of hindsight, let’s reflect on what we could learn from past events:
- We know that vaccines have successfully reduced the likelihood of an even higher mortality rate. But Omicron has shown us that the risk of transmission is still high, prompting discussions about a fourth booster jab.
- The furlough scheme ended in September 2021 and despite fears of higher unemployment, the rate moved lower
- Supply chain constraints and labour shortages exacerbated inflation.
- Businesses faced difficulties with forecast planning, while liquidity was key.
We must not gloss over the political woes and market uncertainty created by Britain’s historic departure from the EU in 2020 – a prime example of the Brexit effect was the bitter dispute between France and the UK overfishing licences.
What should we expect this year?
What factors could impact the pound in 2022 – and how should we prepare for them?
Sky high inflation will remain a driving force behind interest rate speculation, with major central banks gearing up for a cycle of hikes to keep a lid on living costs – conditions that are likely to boost the pound. A gust of headwinds could fan the inflation flames this year: supply chain issues, reduced labour-power, and higher energy costs. While a Bank of England (BoE) survey showed that British companies are planning to inflate prices by 5% in the next year.
The BoE blazed a trail in December 2021, becoming the first major central bank to raise borrowing costs from their pandemic-era lows, in a bid to tame inflation. With the starting gun fired, economists expect the BoE to lift the base rate as high as 1.25% by the end of the year using a cycle of three hikes. If this increases to four, the pound could become stronger, but a reduction to two is likely to have the opposite impact on the UK currency.
The pound’s performance will also be dictated by the interest rate outlook of the BoE’s contemporaries. For example, the US Federal Reserve is also eyeing up three interest rate hikes in 2022, while the pound has already gained against the euro as currently there are no plans to raise rates in the Eurozone.
The UK economy – and the pound – is likely to take their cues from monetary policy in 2022. Last year, the world’s fifth largest economy weathered the end of the furlough scheme but was strangled by rising inflation. This year, the forecast for a cycle of interest rate hikes is likely to make credit and borrowing more expensive.
While tightening monetary policy should cool inflation, there are concerns that increasing the cost of debt will put pressure on households that are already struggling with a cost-of-living crisis. If inflation-inspired rate hikes trigger a decline in economic growth, worries regarding a downturn and stagflation will emerge – a situation in which the inflation rate is high, the economic growth rate slows, and unemployment remains steadily high.
Political uncertainty has been a common theme since the Brexit vote in 2016 – and that trend has continued in 2022. Labour overtook the Conservatives in opinion polls following allegations that lockdown rules were flagrantly broken by members of the ruling party in May 2020. The subsequent loss of public confidence was underscored by the result of the North Shropshire by-election in December – a previously safe seat held for nearly 200 years by the Conservatives that was wrestled from their grasp by the Liberal Democrats.
The political turmoil that’s engulfed Mr Johnson’s leadership in the wake of ‘partygate’ has seen odds slashed on the probability that he could be replaced as a leader this year. A leadership challenge – and subsequent shifts in the political outlook – could result in a swing in the pound’s value. Local elections are due to be held in May; if Mr. Johnson is still in power then they could provide a good indicator of the political landscape. Markets are averse to political uncertainty as it can force a change in monetary policy and the direction of the economy.
The emergence of the Omicron variant has provided a stark reminder of both COVID-19’s durability and t the potential for another global lockdown if another stain emerges – a scenario that would weigh heavily on the pound. In the meantime, the unwinding of restrictions should result in an increase in economic growth, benefiting the economy and the pound.
So, what does this mean for your business?
By taking the time to understand these factors and their potential impact on the economy, your business can better prepare for the challenges ahead. A couple of questions that businesses should ask in 2022 include:
Do you price your overseas payments exchange rate of a fixed 12-month budget, or do you work off a cost level based on the current rate? You may determine your currency exchange rate loss/gains and impact on user pricing depending on the method you use.
Do you consider the impact of currency movements on the business’ profit? For example, if you’re working on a 20% profit margin, a 1% movement in the exchange rate could mean a 5% impact on profitability.
Can you quantify how currency exchange market volatility could impact your business? Whilst this is a variable that nobody has control of, we can review the differential between the high and low forecasts from analysts and banks whilst also looking at the historic trading data.
The only certainty in the world of currency markets is uncertainty, so be proactive and mitigate potential risk. Your currency exchange policy doesn’t need to be another variable that you feel powerless to tackle. At Lumon, our currency experts can illuminate a path that suits you whilst shining a light on areas to be mindful of. We have various trading tools, data, and knowledge to inform your decision-making – and will be restless in our approach to find a solution that works for you. Feel free to speak to one of the team for further assistance.
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This blog post is intended to provide you with information on the services Lumon Pay Ltd (“LPL”) offer and should not be interpreted as advice or as a solicitation to offer to buy or sell any currency or as a recommendation to trade. Foreign exchange rates provided therein are for indicative purposes only and are not intended to give an accurate reflection of current currency exchange rates or to predict future movements in currency exchange rates. LPL, trading as Lumon, is a company registered in England with its registered address at Building 1, Chalfont Park, Gerrards Cross, Buckinghamshire SL9 0BG. LPL is authorised by the Financial Conduct Authority as an Electronic Money Institution (FRN: 902022).