No matter whether it’s a weekend away in a captivating city or a fortnight-long retreat at a luxurious beach resort, taking a break from the trials and tribulations of daily life to go on holiday is something we all look forward to.
But, while you might feel like a million miles from home, what goes on back in the UK can actually have quite a significant impact on your travel plans. Recently, the news that interest rates could be raised in the coming months sent sterling soaring to a seven-and-a-half year high against the Euro.
What’s more, you might not think that things like stocks and shares and the wider economy will affect your holiday, but they can actually determine whether you get good value for money or not.
Buying foreign currency
Most major economies around the world have a floating exchange rate system, which allows the value of a currency to fluctuate according to the foreign-exchange market. Things that can make a currency rate go up and down include interest rates, economic performance, supply and demand, inflation, and stock market movement.
Holidaymakers coming from a country where the currency is strong will be able to get more foreign cash for their money. At this moment in time, travellers from the UK can take advantage of cheap holidays to any of the other 19 Eurozone member countries, as the Pound now buys more Euros than at any other time in almost eight years.
The same can’t be said for trips to America though, as the US dollar is quite strong right now. But why are the Pound and Dollar doing so well?
Reasons for strong pounds and dollars
After Bank of England governor Mark Carney revealed that interest rates could soon rise, foreign exchangers decided to buy up the Pound while it was still good value for money. This, in turn, caused Sterling to go up in value – with a greater demand meaning that it attracted a greater price. Across the Atlantic, the Federal Reserve chairwoman Janet Yellen is also determined to increase American interest rates, causing foreign exchangers there to do the same.
However, the Pound’s current advantage on the continent is due to the ongoing Eurozone crisis, which has weighed on the single currency’s value for quite some time. Traders have eschewed the Euro in response to the rescue package for Greece, which might not be politically or economically sustainable.
Looking ahead to 2016
If interest rates rise and the Eurozone economy doesn’t pick up, there is no reason why the Pound can’t continue to go from strength to strength. However, according to Lloyds Bank’s International Financial Outlook for November 2015, the Euro will bounce back to 1.36 by the end of 2016. On top of that, if the UK public votes to leave the European Union, Sterling could come under pressure just like it did in the build-up to the Scottish referendum last year.