The pound has risen to its highest level in more than two years against the euro and dollar, which is great news for those looking to buy holiday money or make an international payment.
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The pound rose to a new high of 1.3382 against the dollar on Tuesday as it looks to secure a fifth consecutive daily gain. It rose to above 1.20 for the first time since April 2022 against the euro.
The pound’s surge: what it means for holiday money buyers
For those looking to buy travel money, the best euro exchange rate looks to be with Wise currency card at 1.2008. Be aware that they charge a sliding fee, which lowers the effective exchange rate to 1.1933. If it is cash you are after, TravelFX are offering a rate at 1.1813.
For dollar buyers, the Wise currency card will be delivering an effective exchange rate (remember we are subtracting their fee) of 1.3258. TravelFX will deliver your cash at a rate of 1.3195.
Will the pound continue to rise and give even higher rates? Right now, it looks like this is a possibility, as a lot has gone right for the currency in 2024.
How interest rates are impacting the pound
The most important development has been the Bank of England’s reticence on cutting interest rates as Britain’s inflation rate is so stubbornly high. If it cuts interest rates too fast, it risks stoking it up again.
But the side effect of higher interest rates is strong demand for UK bonds and other assets by foreign investors looking for a good return. This creates inflows of capital that support the pound.
GBP/USD received a bump last week when the Federal Reserve finally took the plunge and lowered interest rates, thinking that the U.S. economy is starting to slow and that inflation has been tamed.
This means the UK’s central bank interest rate is now above that of the U.S., which has bolstered the pound relative to the dollar.
The eurozone’s economic challenges and their effect on exchange rates
Turning to the euro, news this week has not been good supportive as it is clear the Euro Area’s economy is potentially in a recession.
The PMI survey released on Monday showed a rapid slowdown of activity in September and will raise the alarm in Frankfurt, where the European Central Bank will have to consider cutting interest rates again in October.
This would be the third cut from the ECB and puts it well ahead of the Bank of England.
By contrast, the UK’s PMIs showed Britain’s economy remained in expansion mode in September with ongoing signs of inflationary pressures. This will keep the Bank of England on hold until November and support UK bond yields.
UK economic outperformance relative to the Euro Area is proving a powerful narrative for currency traders and explains the jump by the pound against the euro.
Could the pound’s rally lose steam? What experts say
Although the backdrop is supportive of further pound gains, it must be remembered that currencies never move in straight lines. The chance of a retreat grows by the day with some analysts warning the rally means the pound is overbought.
However, weakness should be shallow, for the time being at least.
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