Important information: The value of investments and the income from them, can go down as well as up, so you may get back less than you invest.

UK consumers have had very little to cheer about so far this year, but a strong pound is a small comfort in a world of rising prices. The pound is up 0.6% so far this year against the dollar, at $1.36.

Why is the pound so strong - and what does it mean for you and your money?

Reason 1: Interest rates are key

The key driver of the strong pound is interest rates. Typically, the two go hand in hand: the higher a country’s interest rate, the more attractive the currency becomes to foreign investment, which in turn bolsters the pound.

It’s no surprise that rising interest rate expectations, driven by rocketing inflation figures, are the chief agent behind sterling’s upsurge. So long as rates continue to rise (which they will if prices do the same), the outlook for the pound is positive.

The flip side is that investors have priced future rises in. They’re forecasting another hike in February, following last month’s 0.15% increase, and see rates eventually rising to 1% by the end of the year. That’s a bold estimate given the Bank of England’s recent track record of defying expectations, and as the inflation trajectory remains hard to discern.

There’s also worry that currency traders, who flocked to sterling when the Bank became the first major Western bank to move on rates, will turn elsewhere as others catch up.

Reason 2: A strong(er) economy

Despite the rising cost of living, investors are finding enough signs of life in the UK’s economy to support its currency.

The UK economy expanded beyond pre-pandemic levels for the first time between October and November, while jobs data published earlier this week showed that Britain’s labour market is growing strongly.

The threat of Omicron also appears to be subsiding, putting the UK on course to see all restrictions removed next week. A return to normality would prove a boon to the pound.

Reason 3: Less Brexit blues?

Brexit has hung over the pound like the proverbial sword of Damocles. The state of a currency often reflects confidence in its economy, and years of Brexit bickering did little to endear foreign investors.

Now, the pound is rallying close to its highest level against the euro since 2016, as some of those anxieties finally abate.

What the stronger pound means for you

A strong pound is broadly good news in today’s environment of rapidly rising prices. It pushes down the price of imported goods, as well as the cost of filling up your car with dollar-denominated oil.

It’s also good news for those booking their summer holidays. Now may be a good time to lock in those favourable exchange rates, especially since there’s no guarantee the pound will continue its recent ride upwards.

Watch Tom Stevenson’s view on the outlook for the UK in Q1.

Important information: Investors should note that the views expressed may no longer be current and may have already been acted upon. This information is not a personal recommendation for any particular investment. If you are unsure about the suitability of an investment you should speak to one of Fidelity’s advisers or an authorised financial adviser of your choice.

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