Exchange rate forecasts: How will British pound sterling react to the Olympic games?

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Published on Wednesday, 25 July 2012 10:56

Written by Will Peters

International Money Transfers at our sister site

Analysts at Barclays have today sought to answer the concerning how the pound sterling (Currency:GBP) will respond to the Olympic games.

The opening ceremony of the 30th Modern Olympic Games is in two days’ time, and Barclays has taken a shot at forecasting the pound's performance as a result.

In a note to clients, released today, Sara Yates at Barclays says:

"We examine empirical evidence as well as four channels through which a large sporting event could affect the host currency to gauge how GBP will be affected."

Yates does caution however that previous sporting events have been accompanied and followed by a wide range of outcomes.


Consequently, the approach adopted by Barclays does contain the warning that there is no clear steer for how GBP will respond to the London Games.

According to Barclays' analysis, there are four channels through which a host currency could be affected by a large sporting event:

1. Increased tourist demand for the currency. Tourist demand for the host currency is likely to pick up during the Olympics. Even so, the additional flow is likely to be tiny relative to the daily volumes.

2. Sustained improvement in economic conditions leading to a change in monetary policy expectations. It is not clear if the Olympics will boost Q3 GDP. If it does, we do not expect the improvement to be sustained. As the MPC looks through temporary changes in the economy, the Olympics are unlikely to affect monetary policy expectation.

3. Improved sentiment. The Olympics may boost growth and sentiment towards the UK in Q3. If so, GBP may be supported. However, relative sentiment towards the host market has not consistently improved following a major sporting event.

4. Improvement in the UK’s terms of trade. Goods sold to foreign visitors are an invisible export. If domestic producers use the Olympics as an opportunity to raise their prices, the UK’s terms of trade would improve. We find no evidence of a country’s terms of trade being boosted by the Olympics.

"The Olympics are unlikely to be an important driver of GBP in Q3. Rather, we continue to expect EURGBP to depreciate on the back of the ECB’s more aggressive loosening bias than the MPC, as well as elevated concerns about the speed of progress on the euro area debt crisis. Whereas, we expect GBPUSD to move largely sideways: capped by concerns over the euro area and supported by market expectations for QE3 in the US," says Yates.