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September could bring an interest rate cut from the Federal Reserve. How will it affect your business?
The Bank of England, the European Central Bank and the Federal Reserve could all cut interest rates this month, which means your budget could soon be at risk of currency volatility.
This week’s blog looks at the case for interest rate cuts around the world and asks what it means for your business.
Autumn angst
As September opens, easing price pressures have combined with stable (if slightly subdued) growth figures in the Western world. That has led markets to talk of a ‘Goldilocks effect’, whereby inflation is tamed without resulting in broader economic contraction. Admittedly, we aren’t there yet. Germany, Europe’s largest economy, is seeing its once dominant manufacturing sector contract, while the UK is struggling to find impetus under its new government.
Yet the case for interest rate cuts is a strong one. Labour data from the USA implies a broad decline in hiring appetite. Headline inflation has meanwhile dipped below the symbolic 2% threshold in the UK and a number of European economies. The momentum appears to be shifting.
However, this has left currency markets in thrall to interest rate speculation. One notable beneficiary has been the pound — currently enjoying a strong period due to the perception that the BoE is unlikely to cut interest rates this time around. There is also a decent chance that the Federal Reserve opts for a more significant initial cut (0.5%) than its peers across the Atlantic, further supporting GBP/USD.
Change is not limited to our three main currencies, however. Canada and Sweden are two notable cases of central banks looking to reduce rates fast, while the Bank of Japan is also looking to move in the opposite direction. As we saw at the start of August, central banks that are typically viewed as fringe can have a telling say on global markets. Whatever their exposures, businesses should not underestimate the impact of monetary policy in other corners of the world.
What do changing rates mean?
Interest rates have a significant impact on global currency pairings. Typically, lower borrowing costs will reduce the relative value of a currency, although a variety of other dynamics can also have an impact. As anticipation of interest rate decision grows, currency markets can experience significant fluctuations as traders look to insulate themselves from their impact.
For businesses, the difference of a few percentage points in currency exchange can translate to a massive impact on the balance sheet. Recent history has shown just how damaging unaddressed currency risk can be to financial health. Add to that the unpredictable nature of currency markets and the need for a robust risk management strategy becomes clear.
Clouds on the horizon
With the end of the year approaching, change is afoot. As if the world hadn’t seen enough volatility this year, we are drawing ever nearer to perhaps the most significant event of them all: the US presidential election.
We will be treated (or subjected) to the first debate between Donald Trump and Kamala Harris next week. Ahead of November’s poll, it’s typical for US markets to see heightened volatility and more outflows as investors look to hedge against risk by moving their money elsewhere. The US dollar may well come under pressure, but the really risky realisaton for businesses is that nobody can say for certain where exchange rates will move.
Get ahead of any volatility and ensure your profit margins are protected at all times. Speak to the experts today to see how you can protect your budget from currency risk.
Call 020 7898 0500 to discuss a forward contract; alternatively, if you’re new, please register with Smart Currency Business today.
