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Cheaper Foreign Currency: What’s Happening to the Pound in 2018?

Published: 02 Feb 2018

If you’ve been paying attention to the news, you may have noticed that the pound has risen in value steadily during January 2018. This something that many did not expect; particularly as the pound’s performance over the past 18 months has been terrible when compared to previous years.

Directly after the Brexit referendum in June 2016, the value of the pound dropped sharply to levels not seen since 1985. As a result, the cost of living is said to have increased and the weakening of the pound against other currencies - such as the euro and the US dollar - has stung holidaymakers. Only now is the value of the pound beginning to get close to pre-Brexit levels again… but why now? And what does this mean for British holidaymakers this year?

Why is the pound gaining strength?

The pound, or GBP as it’s known on the stock market, has performed well against other currencies in 2018 so far. In fact, it’s the strongest performer of all G10 currencies when compared to the US dollar over the past six months. The G10 currencies are the most heavily traded in the world and consists of the US dollar, the euro, the Japanese yen, pound sterling, the Swiss franc, the Australian dollar, the New Zealand dollar, the Canadian dollar, the Swedish krona and the Norwegian krone. It’s a strong group, so why is the pound doing so well?   

Brexit

Although it is Brexit that has caused the overall dip in the pound’s value, positive news surrounding Brexit is also helping to buoy it up. As talks continue over Brexit between EU leaders and the UK government, the markets seem to be feeling less sceptical about the success of Brexit and what it will mean for the economy. That’s not to say that the forecast is necessarily good – it’s simply ‘less bad’ than initially thought.

The government is in a tricky spot over Brexit, with many MP’s, donors and corporations on both sides of the argument coming forward with particular demands. Political uncertainty tends to have a negative effect on the value of that country’s currency, which puts Theresa May in a delicate situation. The value of the pound relies heavily on her ability to hold the government together and in how Brexit pans out over the next year.

The economy

The UK economy has done better than forecast during the last three months of 2017. Economy growth was predicted at 0.4% but came in at 0.5% - a small change; but one that has had a large impact on the currency market. However, according to the Office for National Statistics (ONS), this growth was “uneven”, with certain sectors doing much better than others.

That being said, the news that the UK economy is doing better than expected has had a very likely impact on the rising value of the pound throughout the first 30 days of 2018.

US Dollar weakness

There are many who believe that the pound only appears to be doing as well as it is because of the relatively weak dollar. The US dollar has seen a 10% decline over 2017, and has already lost nearly 2% of its value in 2018 so far. In comparison, the pound looks to be doing well, but with a stronger US dollar the story may be very different.

The weakening of the US dollar is thought to be due to investment uncertainty created by the current administration. President Trump‘s record so far is causing worry about the USA’s status on the world stage, and comments made by the Treasury Secretary that a weaker currency was “beneficial to US trade” have not boosted confidence in the markets.

What does this mean for foreign currency exchange?

When the pound is rising in value and performing well against other currencies, this means that you can get more for your budget when it comes to buying your holiday money.  Back in March 2017, exchange rates show that you could buy $1.21 with £1. In the months since, the pound has made gains, so that as of 31st January 2018 you could buy $1.41 with £1.

While this may not seem like much of a raise, it makes a real difference when applied to larger amounts being exchanged. For example, if you wanted to exchange £500 into US dollars in March 2017, you’d get around $605. Exchanging the same amount (£500) on 31stJanuary 2018 would result in around $705. This extra $100 spending money can clearly make a big difference to holidaymakers. 

If you are planning a trip abroad this year, perhaps to the USA or to somewhere on mainland Europe, considering when to exchange your pounds into US dollars, euros, or any other currency is important. Buying at the right time can ensure you’re getting the most for your money and judging by recent performance, it would be fair to ask if the right time is now.

Will the value of the pound continue to rise?

As with anything concerning the stock markets, any speculation is just that, and should be taken lightly. No one can say with any confidence what will happen to currency values over 2018 as no one can accurately predict the future, and even if they could, it’s not always easy to see which way the market will go in response. Currency values are the result of many different influences which cannot be controlled, so there are those who are taking the opportunity to buy their foreign currency now, while the pound is looking strong.

However, the pound may well continue to strengthen against the euro, the US dollar and other world currencies. If Brexit talks continue on and the UK government are successful in avoiding a ‘hard’ Brexit, the pound is likely to continue to rise in value over the coming months. However, problems within the governing party, another election, a breakdown in Brexit negotiations or even the strengthening of other currencies could send the pound southwards once again. When you decide to get your travel money is up to you, of course, but it’s always worth keeping an eye on current events for clues as to whether more growth is on the cards.