The latter half of 2022 was certainly eventful in terms of political and financial upheaval, and volatility in the value of sterling against other major currencies has left some investors uncertain about its implications for their investments. September 2022 saw the largest fall on record when sterling plummeted almost 5% to as low as $1.0327. This ‘low’ took the value of sterling to less than its 1985 low and its weakest position since decimalisation in 1971¹.

The Bank of England will always keep a keen eye on the falling pound as it’s in those situations when rates may be increased to reduce inflation in an attempt bring stability and calm. It’s been widely reported that the war in Ukraine is the main reason for energy prices increasing, and as a knock-on effect, energy is fueling inflation. Energy is bought in dollars, and so the lower the value of the pound, the more interest rates have to rise¹. While it is true that a fall in the pound's value can have an impact on financial markets, there are ways that you may be able to mitigate any potential losses and even benefit from currency volatility.

Investments denominated in foreign currencies

At a day-to-day level, a weaker currency can mean that purchasing domestic goods and services becomes much more expensive if they are priced in foreign currencies. In short, when the pound falls in value, it means that returns on investments denominated in foreign currencies are higher than if they were in pounds.

This works both ways, though - if the pound rises, then returns may be reduced or at least affected by exchange rate changes. To mitigate this impact, investors should ensure they have sufficiently diversified portfolios that can respond to market conditions changes.

Carefully monitoring currency movements is key

For day-to-day transactions, particularly overseas payments and transfers, a weaker pound can have a significant effect as costs become more expensive when converted into pounds.

To reduce potential losses, investors need to monitor currency movements carefully and use professional foreign exchange services to ensure they get the best rate when making payments or transferring funds.

Strategies most effective for mitigating risk

Diversifying investments across different markets and currencies spreads risk, and by doing so, investors can protect themselves from major fluctuations in one currency by investing in other currencies.

Investments and secure long-term returns

Having an understanding about how the changes in the fluctuations in sterling can affect not only day-to-day living expenses and costs, but also longer-term investments is important, but it’s also a good idea to consult a regulated wealth planner or adviser before making any decisions about your investments or taking advantage of changes in currency values. They will be able to provide up-to-date information on the economic climate, market conditions and what strategies may be most effective for mitigating risk while taking advantage of any potential gains.

Doing so can help ensure that your investments are secure and profitable in the long run, make the most of changes in currency exchange rates, and protect your investments from potential losses. With careful planning, it is possible to benefit from even a volatile market environment.

Receiving professional advice on currency and investment management will help you navigate the complexities of the international markets and prepare for future sterling fluctuations. Ultimately, this will help you to protect your investments and secure long-term returns.

Sources

¹ 21st October 2022 | How does the fall in the pound affect my money? | The Times

Please note: This article is for general information only and does not constitute advice. The information is aimed at retail clients only.

FP2022-456