The impact of interest rates on the currency market

When you buy a property abroad, you must be considering the exchange rate from the beginning and throughout the journey, as small changes can have considerable impact on your purchase price.

But what impacts exchange rates?

Exchange rates are impacted by many different global, economical, environmental and political factors, one of the most notable being interest rates. But why, and what effect can this have on your property purchase?

Typically, the pound strengthens when the interest rate is raised and weakens when it is cut. This is because the pound’s exchange rate is determined by investors trading sums of currency. If there are signs that the UK economy is expanding (such as interest rate rises), then pounds become more desirable, leading investors to buy into that currency. As a result, when investors buy more pounds, we typically see the value of sterling increase.

What can we expect from Interest rate rises?

Interest rates have been a hot topic for some time now and the Bank of England increased the base rate once again on the Thursday 3rd August to 5.25%.

On that day, the rate moved from 1.1565 to 1.1631 after the announcement from the Bank of England.

This is a very modest move, however for somebody looking to purchase a property for €350,000, this fluctuation over the course of a couple of hours is the equivalent to £1,680.

To see another example of interest rates on the FX markets, back in June 2022, the Bank of England announced their interest rate hikes in their monthly meeting. This was slightly lower than expected at 1.25%. Markets were expecting a higher increase and so as a result, the Pound fell against its counterparts.

As a result, the pound hit a 2 year low against the Euro, falling to 1.147 (15th June 2022) compared to a 1.177 (9th June 2022) the week before.

In this example, for a buyer looking to purchase a property for $350,000, it would cost them a £297,366 at the rate of 1.177. At the rate of 1.147, this would have cost £305,143. In the space of 6 days, the price increased by £7,777.

If you are a buyer who is working with a tight budget, £7,777 can be the difference of not being able to afford your property.

How can you prevent this from happening?

Fortunately, there are tools available to you to prevent your budget from being affected by a drop like this.

Using a currency specialist opens the door to a multitude of options for you. You have access to a competitive rate of exchange and the expertise of a currency specialist whose role is to help you plan your transfer to make the most of your money.

Here are an example of a few of the tools available to you and how they can benefit your exchange:

• Spot contract- A spot contract is an agreement between you your FX provider to exchange money and buy foreign currency at the present exchange rate. This is the most common and traditional form of currency exchange and is suited to addressing any imminent currency transfer needs you may be.
• Market order- you could target a rate of exchange and if that rate is then hit, we could either buy the funds for you automatically, or notify you for your permission to buy. With the same principle we can set up a limit order to protect your transaction in case the rate falls below a certain level. This suits those who have some time on their hands and are optimistic that the rate might improve within their time frame. One of the advantages of the market order is to ensure that the currency is bought at the desired level even if the market only touches that level very briefly – and this includes when the markets are closed for trading.
• Forward contract- This allows you to fix a rate of exchange up to two years in the future in advance of a payment. This tool is very popular among property buyers as it allows them to fix the whole price of the property ahead of completion giving them the peace of mind and the certainty of how much they are going to pay for the property.

The importance of Time

Time is your biggest friend. The more time you have, the more opportunity you have to take advantage of these tools and increase your budget. It also allows you to add some certainty around your budget. As soon as you know your budget, you need to be speaking to a specialist.