It’s up against the US dollar and the euro, as well as against last year's strongest currencies - the Swiss franc, Japanese yen and Aussie dollar.
This is great news for pensioners and those living off savings held in sterling. You could be getting the best rates for two years.
But for the thousands who had given up and are just about to head home, it won’t be welcome unless they took steps to lock into the best rates for their local currency last year when the pound was struggling.
So what is going on?
Part of the boost has been a growing belief that the UK may be the first major economy to raise interest rates. The Bank of England Monetary Policy Committee meets tomorrow and faces a difficult decision. The jump in oil prices caused by the unrest in Egypt and neighbouring countries will fuel inflation, already at worrying levels. Yet a hike in rates may damage the fragile economy.
If interest rates are kept on hold again this week we may see a temporary dip in the pound, but the majority view is that the pound could stay strong in the medium to long term.
Both the pound and the euro have had a good run so far this year, but signs are that the euro may have run out of steam. It fell against the US dollar and the pound this week, with further falls expected.
The market was shaken at the start of the week by a larger than expected drop in German industrial orders. Weakness in the German recovery helps push the prospect of an EU interest rate rise further away.
In addition, reports of infighting among the 17 member nations of the currency bloc over the best way to deal with the debt crisis have kept the euro on the back foot. A French and German push for a comprehensive package of reforms to address the crisis has met with opposition and jeopardised plans of achieving a comprehensive new bailout regime by the March target.
Greece’s finances are currently centre stage with officials from the International Monetary Fund, the European Commission, and European Central Bank in Athens this week. They will be deciding if Greece has done enough in terms of restructuring its economy to get a further €15 billion - the next instalment of the bailout plan agreed last March.
Greece has spoken out against Germany’s latest proposals saying it gives the EU too much power to interfere with national constitutions. Other troubled nations - Portugal, Belgium, Spain, Italy, Austria and Ireland - have also raised objections. They argue Germany and France are going too far in attempting to exert control over sensitive issues such as taxes, pensions and wages.
“Getting 17 member nations to agree on a unified retirement age, public sector wages and harmonising welfare systems may be harder to implement than the intended reforms," said Vimal Popat of Cambridgefx.
“The European economic policy crisis is in danger of turning into a political one if member nations cannot reach an ultimate resolution and this uncertainty is likely to impact the currency even further. Therefore, the euro’s reasonably strong performance so far this year seems, in my opinion, unsustainable.”
In contrast, the UK, while facing similar pressures to the eurozone, has a distinct advantage with only a single monetary programme to follow.
UK fiscal policy has, so far at least, impressed the markets.
According to Chris Saint, senior currency analyst at Hargreaves Lansdown, both sterling and the euro have been boosted so far this year by “a cautiously optimistic mood that the European sovereign debt crisis can be contained”.
The events of the past week however have been a reminder that these problems are not going to disappear any time soon.
“So with the UK’s banking sector seemingly on a surer footing there appears to be further scope for sterling to make up ground against the euro," he adds.
“This would offer some relief to embattled expats still needing to exchange sterling to cover overseas living expenses.”
Jeremy Cook, chief economist at World First is cautiously optimistic: “Sterling has been the best performer of the G10 currencies this year so far. However, while I see sterling moving higher over the course of the year, it will not be in a straight line and considerable risks to both the UK economy and sterling remain.
"The increase in sterling is an obvious benefit to the pension pots and the savings accounts of expats; a trend that we do not expect to see alter in 2011 although the inflationary pressures in the UK economy will have seen the value of these savings diminish in real terms.
“Although we believe the trend is upwards for the pound I would advise those funding themselves from a UK-based pension or savings account to look into protecting themselves against potential losses.“
Michael Derks of FXPro feels the growing possibility of an interest rate hike is helping to lift the pound: “The UK may be the first major advanced economy to start tightening monetary policy, in response to persistent and rising inflation. As a result, the expected timing for the first interest rate hike by the Bank of England has been brought forward quite significantly.
“At the start of the year, the widespread expectation was that sterling would struggle again this year, with the economy likely to be weighed down by both the harshest cuts to public spending for more than a generation and a continued squeeze on real incomes. However, for the most part, the economy seems to be weathering the fiscal onslaught reasonably well.”
Charles Purdy, director of Smart Currency Exchange, also feels a UK interest rate hike may come sooner rather than later: “Inflation is becoming a major problem, certainly in the UK. This may force the Bank of England's hand to start increasing interest rates earlier than it wants. If they did, it would be sterling-supportive and as such be very helpful in reducing imported inflation.”
He also argues that the scale of the debt problem faced by the eurozone favours the relative strength of sterling.
“In the euro zone the level of funds that needs to be raised in the current year exceeds €800 billion. The Stability Fund is only a fraction of this amount and as such would need to be increased very significantly if it was to become a longer term solution. The euro is therefore in a more uncertain position than sterling given the diversity of the problem,” said Purdy.
Christina Weisz, director of Currency Solutions, comments: “Anyone looking to transfer funds between the UK and Eurozone last year had to manage an 11 per cent currency fluctuation and for anyone living off pensions and overseas salaries, this variation was huge.
"The UK has benefited from good export and manufacturing figures which have in part been attributed to the weak pound. When interest rates are raised we may see sterling gain further ground against a basket of major currencies.
“The eurozone has seen a mixed story. Sovereign debt, spiralling unemployment and subsequent civil unrest have plagued the weakest members.
"The recovery of the euro is unlikely to be smooth and positive stories from France and Germany will need to be matched by a period of calm from the struggling nations.”
Simon Smith of FXPro agrees that both sterling and the euro continue to face uncertainty: “Both face fairly substantial and contrasting risks. For sterling, it’s that the fiscal austerity does impact the economy and lead to a further slowdown in growth. For the eurozone, it’s that the changes to the European Financial Stability Facility do not avoid the likelihood of some sort of debt restructuring in Greece and also in Ireland.”
Of course currency movements are affected by the wider world. The unrest in North Africa and the Middle East has increased inflationary pressures - oil is now above $100 a barrel - and raised the spectre of major trade disruptions should the Suez canal be closed.
Source: http://www.telegraph.co.uk
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