For example, let’s say that you intend to exchange pounds for euros, and you look at the exchange rate one day, and it’s 1.15. This means that for every 1 pound you exchange, you’ll get 1 euro and 15 cents.
Then, the next day, you look at the exchange rate again, and it’s risen to 1.20. For every 1 pound you exchange, you’ll now get an extra 5 cents in euros.
Hence, on the first day, the pound is weaker, then on the second day, it’s stronger. This is because, on the second day, 1 pound will buy you more euros.
Moreover, the pound is strongest when 1 pound will buy you more foreign currency than ever before, and weakest when 1 pound will buy you less currency than in history.
For instance, on October 27th 2000, the pound to euro exchange rate reached 1.7331. This means that, on that day, 1 pound bought you 1 euro and 73 cents. This is the highest sterling has been against the euro this millennium, so on that day sterling was strongest.
By comparison, on December 6th 2008, sterling fell to just 1.0422 against the euro, close to parity. This was the pound’s weakest since 2000.
What’s more, whether the pound is strong or weak depends on what foreign currency you’re talking about. This is because the pound is valued against all the other currencies in the world, like the US dollar, Polish zloty or United Arab Emirates dirham, and all these exchange rates are different.
For example, one day the pound to euro exchange rate might hit 1.7331, a 17-year high, in which case sterling is strong versus the common currency.
However, at the same time, the pound to US dollar exchange rate could be just 1.2040, a 31-year low, whereby sterling is weak against the greenback.
To summarise then, when we say that the pound is strong or weak, we first have to specify against what foreign currency we’re talking about, and over what time frame.
As we’ve seen in this article, sterling can be strong versus one foreign currency, yet weak versus another, at the same time.
In addition, the pound can climb against a foreign currency over a week, in which case it’s stronger, yet still be below where it was a month ago, making it weaker.
In brief then, to find out if the pound is strong, define against what foreign currency you mean, and over what time frame!