The pound extended its recent winning streak against the euro this week, touching its highest level in 17 months. The move came as fresh data painted a split picture of the UK economy: businesses sounded increasingly confident, while households showed signs of strain.
Sterling rose to 83.62 pence per euro before settling around 83.70 pence, according to the latest figures. That marks a continuation of a four-week climb that has seen the currency gain steadily against its European counterpart.
What's driving the pound higher?
Currency markets often boil down to a simple question: which economy looks more likely to keep interest rates higher for longer? Higher interest rates tend to attract foreign capital, boosting a currency's value.
On that front, the UK's business sector delivered an upbeat message in October. S&P Global's UK Composite Purchasing Managers' Index (PMI) – a widely watched survey that measures activity across manufacturing and services – rose to 53.1 from 52.0. Any reading above 50 signals expansion, so the increase suggests the UK's private sector is growing at a slightly faster pace.
That strength stands in contrast to some of the UK's neighbours. Recent PMI readings from the eurozone have been more subdued, with French business activity slipping back into contraction and Germany's October PMI cooling. When the UK's economy looks relatively healthier, investors are more inclined to bet on the Bank of England keeping rates higher for longer compared with the European Central Bank – a dynamic that tends to support the pound.
But the consumer is wobbling
While businesses are feeling more optimistic, the same cannot be said for UK households. September retail sales fell, and consumer confidence has also weakened, according to the data cited in the brief. That suggests the cost-of-living squeeze and higher borrowing costs are still weighing on everyday spending.
This divergence is not unusual. Business surveys often reflect the outlook of companies, which may be benefiting from stronger export demand or improved profit margins, while consumers are still adjusting to the cumulative impact of inflation and interest rate rises.
Still, the mixed signals create uncertainty about the UK's growth trajectory. If consumer spending continues to falter, it could eventually drag on the broader economy, even if the business sector remains resilient.
What it means for investors
For everyday investors, a stronger pound has several implications. If you hold overseas assets, such as US or European stocks, a rising pound reduces the value of those investments when converted back into sterling. Conversely, if you're planning a holiday in Europe or buying imported goods, a firmer pound makes those purchases cheaper.
For UK-based companies that earn a large share of their revenue abroad, a stronger pound can be a headwind. When the pound appreciates, overseas earnings translate into fewer pounds, which can weigh on reported profits. Exporters may also find their goods less competitive in foreign markets.
On the other hand, companies that rely heavily on imports – such as retailers and manufacturers – could see their input costs ease, which might help protect profit margins.
The pound's strength also reflects expectations about interest rates. If the Bank of England keeps rates higher for longer to combat inflation, that could keep mortgage and borrowing costs elevated, which is a drag on consumer spending and the housing market. Investors should watch for any signals from the Bank about the future path of rates.
What to watch next
The coming weeks will bring more data that could move the pound. Key releases include inflation figures, which influence rate decisions, and the next round of PMI surveys, which will show whether the business optimism seen in October is sustained.
Investors will also be keeping an eye on the eurozone, where sluggish growth could prompt the European Central Bank to cut rates sooner than the Bank of England. That divergence would likely keep the pound supported against the euro.
For now, the currency market is rewarding the UK's relatively upbeat business mood, but the shaky consumer backdrop is a reminder that the economy is not firing on all cylinders. As ever, currency moves are rarely one-way, and the pound's recent climb could easily reverse if the data turns.
For those with exposure to currencies or international investments, staying informed about these cross-currents is key. And for anyone planning to spend money abroad, the current strength of the pound offers a rare bright spot.
