Can you cash in on strengthening pound?

The pound has been slowly gaining ground against the Euro, and last night reached €1.23. It's the highest point in two years. While this is clearly a long way short of historic highs, the fact it has rallied a little makes it worth asking whether a rising pound is a positive or a negative thing.

So why has it happened, and can we cash in?

'Less ugly'

The overall picture isn't exactly a rosy one. This isn't a tale of a rallying pound and a strong currency based on a robust economy: it's the tale of the economic woes of the Eurozone bringing the euro crashing even lower. Chris Towner, director of FX advisory at HiFX told AOL: "Sterling looks less ugly than the Euro."


Europe is facing a multitude of challenges. A number of countries are trying to push through austerity measures in order to bring down their debt and stabilise their economies. However, the electorate is rebelling. You only have to look at the flight to extremes in the French election to see how unpopular belt-tightening is.

Meanwhile, things are looking increasingly bleak for Spain, with rising talk of a new bailout plan as it slides back into recession. Towner says the GDP data, high unemployment and low tax revenues, coupled with the bursting of the housing bubble (which has seen falls of 25% since the peak) spell trouble for the country.

Stephen Macklow-Smith, manager of JPMorgan European Investment Trust plc said: "Prospects for domestic Europe have, if anything, deteriorated this year, as austerity bites in the periphery and this slowdown pulls down the Eurozone members who are not affected by concerns over sovereign debt."

The UK

In the UK, the best we can boast is that things don't seem quite so bad. Towner says: "The UK is three steps ahead of Europe in terms of positioning for sovereign debt. The one year data shows we are on target for debt reduction. It puts the UK ahead of Europe in that it's a year further down the line and it has a clear path ahead."

Of course the fact we have slipped into a double-dip recession is hardly excellent news. Mark Bodega, Director at HiFX warned: "Last week's disappointing GDP figures will potentially limit the upside for Sterling now until we see growth return to the UK as the Bank of England could kick start the printing presses again anytime to try and support the economy" - which would be a blow to the currency markets.

However, at the moment the markets are choosing to turn a blind eye to it because they believe the figures will eventually be revised upwards, and they are expecting positive news flow.

What will happen next?

This is difficult to guess, as it depends on what happens both the UK and Europe. Towner expects some volatility, but says: "We are propped up against the valuation we last reached in August 2010, which is a time for pause, but there will be further to go. The overall trend in the near term we would expect is for it to continue higher. Around 127-128 is a more neutral value."

He says the fact that sales of Euros are up 175% at a time when traditionally falls would encourage buyers, shows that the market thinks the Euro is on the way down.

What does it mean for you?

On the one hand, this offers some opportunities. Towner points out it offers some hope for those planning holidays to Europe. "Over the last six months we have seen a 10% increase in the value of sterling which is welcome for anyone planning a holiday, and may encourage more people to take the plunge. Compared to 2007 the pounds is still at a low level, but you could argue that we're half way back to where we were."

It may also offer some wiggle-room in the household budget, as the price of imported goods falls. Towner says: "Hopefully this will be a much-needed dampener on inflation."

However, it's not all good news. On the flip side, it won't do any favours for the government's plans for an export-led recovery - which was already reeling from a stagnant Eurozone which is less in the mood to shop.

There are always positives and negatives to any currency move, the positive here is that in the short-term at least there may be an opportunity for UK consumers to take advantage of the small positive changes - until the negative effects kick in.

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