2020 was a tumultuous year that caught everyone off guard, and there were few who didn’t breathe a sigh of relief as we welcomed in the New Year. But now that we are into 2021 what exactly has changed, and what could be on the horizon that could affect the value of the Pound and other currencies?
Predicting the future is a tricky business, but as former US Secretary of Defence Donald Rumsfeld once philosophised:
“There are known knowns. These are the things we know that we know. There are known unknowns. That is to say, there are things that we know we don't know. But there are also unknown unknowns. There are things we don't know we don't know.”
If that isn’t too clear, let’s divide it up and look at what we know we can expect and what we think we can expect and what we have no idea of.
We know that there will be several important national elections taking place in 2021 – these are already pencilled into the calendar so we can be pretty sure they are known knowns, even if their outcome isn’t. The most important of these from a currency perspective are:
Germany: On Sunday 26 September Germans go to the polls to decide who their next chancellor will be. This is an end-of-an-era election as Germany’s long-term leader Angela Merkel will be stepping down. Given Merkel’s role at the centre of European politics, who gets to replace her in the Bundestag is of key importance for both the EU and the Euro.
Merkel has served a record four terms in government, and her centre-right Christian Democratic Union party is enjoying popular support. However, Germany relies on coalition building to form political blocs, making results difficult to predict. We must bear in mind there has been a resurgence of both far right and far left parties in recent months – many expressing anti-EU sentiment, and if the final result shows a movement away from the centre there could be far reaching implications for the value of the Euro.
Netherlands: But before the German election there’s one to get through in the Netherlands. On 17 March Dutch voters will be casting ballots to decide the fate of current Prime Minister Mark Rutte. If Rutte wins another term, this would make him the longest serving leader in the EU (assuming Merkel does indeed step down), which would give the Eurozone some much-needed stability. However, just as in Germany, populist parties are waiting in the wings to make sure that doesn’t happen. A lot will depend on how voters think Rutte handled the coronavirus crisis.
Coronavirus vaccine rollout and its effectiveness. With the UK, France, Germany and other countries now in some form of national lockdown over virus fears, the speed at which economies can once again open up will be the driving factor behind economic recovery this year. Politicians such as Boris Johnson and France’s Emmanuel Macron are pinning their hopes on the effectiveness of Covid-19 vaccines, with Johnson stating that the UK economy can fully reopen again once the most vulnerable people have been vaccinated. This is expected to be some time between February and April. At the moment we don’t know how effective the different vaccines will be, although the manufacturers all claim that tests have shown high protection rates.
Speaking of economic growth: In 2020 the UK went through its worst recession in over 300 years, so hopes that it will rapidly recover are at the forefront of people’s minds. With the economy having shrunk by an estimated 11 percent last year, this year’s expected growth of around 4 percent means it will still be some 7 percent smaller than before the coronavirus crisis hit.
Unemployment, too, is set to be a problem in 2021. Many jobs were retained in 2020 due to the chancellor’s furlough scheme, which paid workers most of their wages even though they were not able to work. And while variations on that scheme have been extended into this year in the form of wage subsidies, there is still expected to be a hit to employment levels caused by companies becoming insolvent, especially in retail and hospitality. In fact, the Office for Budget Responsibility estimates unemployment will hit 7.5 percent by the middle of this year – which would be the highest since 2014.
House prices: Property prices in the UK have enjoyed a rapid increase in growth over the last few months as the pandemic caused people to move. But Halifax, the UK’s largest mortgage lender, estimates that this will soon come to an end and estimates prices will drop by anything up to 5 percent this year.
The term ‘black swan’ came into everyday usage in 2020. Investopedia defines a black swan as:
__ “An unpredictable event that is beyond what is normally expected of a situation and has potentially severe consequences. Black swan events are characterised by their extreme rarity, severe impact, and the widespread insistence they were obvious in hindsight.”__
Who could have imagined that by April we would be shut inside our houses praying for a virus to go away that few had heard of just a couple of months before? Are there any more black swans on the horizon in 2021? It would be unwise to hazard a guess but given the political uncertainty that currently grips the world, and the economic turmoil that been let loose, all bets are off as to what might occur this year.
Of course, any sudden, impactful event means currency investors inevitably run to safe havens. These safe havens are currencies such as the US Dollar, the Japanese Yen and the Swiss Franc, and they all tend to appreciate in value whenever there’s a lot of risk about, especially the Dollar. On the other hand, currencies such as the Australian Dollar and the South African Rand do badly when there is a lot of risk around. The Euro is considered a safe haven currency, while the Pound has lost its safe haven status in recent years and tends to be driven mostly by economic factors and news headlines.
One thing is for sure this year, nobody knows where exchange rates will be on a day-to-day basis. The value of one currency against another can be impacted by anything from interest rates, to economic headlines, to political upsets. And while that’s just the way it is, wouldn’t it be good if we could somehow know in advance what the exchange rate will be, say, if you were planning to make a big purchase in a foreign currency?
That’s where a currency provider can help out. Using tools such as forwards, you can lock in an exchange rate ahead of time, giving you protection against any swings in the market. If you use a respectable and service-oriented currency firm, such as Currency Solutions, it’s actually very easy to set up an account, meaning you’ll have peace of mind that you won’t lose any money if the exchange rate becomes unfavourable.
If you think you could benefit from a forward contract, or would like to know more about some of our other services, give us a ring today or contact us through our website.
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