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Should you change your money into dollars or euros ahead of the Brexit vote?

Sterling has been on a wild, largely downward ride since the UK voted to leave the European Union on 23 June 2016. Heading into the referendum, £1 would have bought you nearly $1.50 of greenback – trader slang for the US dollar – while by close of play it would have bought you a paltry $1.36.

A fall of nearly 10 per cent over 24 hours is, by any standards, painful – and for the pound it is unprecedented. Even in the currency crisis of the 1990s, when the UK crashed out of the European exchange rate mechanism, devaluation came much slower, with a 30 per cent loss registered against the dollar over 18 months.

Currency movements are strange beasts: generally selling a certain currency is a vote of no confidence in an economy or a government (see the Venezuelan bolívar), or indicates investors smell something fishy in the current accounts (the Turkish lira), while buying is the reverse, or a reaction to the hiking of interest rates. Often though, trading may be simply sentiment driven.
In this case, the former is likely true: as Chancellor Philip Hammond recently confessed, Brexit is going to cost the UK economy – deal or no deal – something markets have suspected all along.

Against the euro, the pound fell a more modest 5 per cent post referendum – with a pound buying you €1.30 on 22 June 2016 and €1.23 by 25 June 2016. There has, however, been no recovery to that level: while the pound rebounded to $1.43 against the dollar in April this year, against the euro it has held firm at around €1.12 since late 2016.

In such turbulent times it can be difficult to know what – if anything – to do. After all, currency moves mean little to the average Brit, for whom how many dollars or euros they can get for their pound means little in Sainsburys.

Those planning a holiday might be more concerned, though, and ahead of parliaments vote next week could be smart to move some money. I remember well a clever colleague who, on the 22 June 2016 changed her holiday money into dollars – just to be safe – and hung on to $240 she would have otherwise lost.

Even if you are not going to Lanzarote for Christmas, you can still be affected by currency crashes. The average shopper has not been entirely unaffected by swings in the pound, as weaker sterling has contributed to a rise in inflation, which has shrunk everyones buying power in the supermarket.

Moreover, had you transferred pounds into dollars pre-referendum and back again, youd be sitting on a technical profit of 10 per cent (minus exchange fees), which suggests all British savers might benefit from paying attention to the pound – regardless of travel plans.
Those living abroad with pounds in the bank may be particularly well served by moving some sterling into their local currency, though. This includes the 250,000 British pensioners currently residing in the EU. An easy way to do this is through currency app WeSwap, which helps savers move amounts under £15,000 around for fees of 1 to 2 per cent.

A smarter move than hauling cash around, though, might be to buy an ETF – or exchange traded fund – that tracks the price of the dollar. Savers can buy funds through a stocks and shares ISA.

David Jones, chief market strategist at Capital.com is particularly keen on Invesco DB US Dollar Index Bullish in GBP, which has risen 22 per cent since 22 June 2016.

Jones says: “Buying the dollar is rarely a bad idea. With Europe facing its own fair share of political turmoil, the worlds reserve currency is a safer bet than the euro – even if parliament rejects the Brexit deal next week and we head for a no deal.”

Gold is another solid option too. Long favoured in regions where currencies have historically been volatile like India and China, not only does gold typically hold its value but rises modestly over the longer term, making it a good inflation hedge. Again, ETFs are a good and cheap way to access it.

Of course, whether any of this is necessary is up for debate. Traders and investors seem split on the prospects for the pound as we approach next weeks vote, with some predicting referendum level plunges while others, like Jones, are more sanguine.

He says: “While there have been some wild intra-day swings, the pound has stayed pretty stable over the past four months. I think markets are expecting parliament to reject the deal and so downward moves are priced in. In fact, I think people might actually be surprised by how little drama there is.”

A lack of drama would, arguably, be a welcome result from on-going Brexit negotiations and with any luck Jones prediction comes off. Few, even perhaps trigger-happy traders, would be eager to see what another 10 per cent fall in sterling might look like – particularly for inflation that is already starting to pull at the pockets of the average Brit.

Lets hope that, at least for now, currency markets know best.

Rebecca Jones is a personal finance journalist and the editor of Good With Money.

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