Is British pound sterling set for a major jump against the US dollar?

Pound coinsCurrency experts are predicting a jump in the value of sterling, which has been trading at historically low levels for some years now.

Some forecasters believe the proud British pound will leap by up to 17% against currencies such as the euro and the dollar, which could have major implications for the UK.

What's been happening to the pound?
Sterling has had a torrid time of it over the last five years or so, plummeting to parity with the euro at one point despite £1 being worth more than €1.50 at the start of 2007.

Michael Petley, chief investment officer at currency specialist The ECU Group, said: "Ever since the unprecedented turmoil and devastating events of 2007/8 that engulfed the UK economy - catapulting all major currencies up in value against sterling by anything from 50% to 117% - we have endured a deeply frustrating and protracted period of economic malaise."

What's happening now?
Sterling rose to an eight-month high earlier this month after strong UK jobs data, but fell back slightly this week when Gross Domestic Product (GDP) figures showed year-on-year output rose by 1.3%, not the expected 1.5%.

Overall, the value of sterling against other world currencies remains weak: today £1 will buy you about €1.18 or $1.60.

However, Petley thinks that the tide is turning for sterling due to improved UK economic data and looming problems for other countries.

"Of late, we have seen extremely positive developments for sterling," he said. "We feel that sterling is undervalued by some 10% to 17% against the major currencies."

Other forecasters agree that the pound is likely to strengthen soon. Chris Saint, head of currency dealing at financial adviser Hargreaves Lansdown, said: "Sterling's trade-weighted value is still low by historical standards, so I think there is potential for further recovery particularly relative to the euro."

What does this mean for the UK?
A strong pound is good news for British holidaymakers, as well as companies that import from elsewhere in the world.

UK exporters, however, preform better when sterling is weak, while investors will need to review their portfolios to make the most of a strengthening pound.

Petley said: "UK investors should be hedging their overseas investments in a number of countries so that their investment returns are not swallowed up or exceeded by currency losses. Likewise, UK companies that are export dependent should consider engaging in appropriate hedging strategies."

Will the pound remain strong in the long term?
Currency values tend to align with interest rates - the higher the rates paid by borrowers and offered to savers, the higher a currency goes.

The Bank of England's pledge to keep interest rates low until the unemployment rate falls to 7% - predicted for mid-2016 - will therefore not help the pound to strengthen against other world currencies over the next few years.

However, many market watchers believe UK rates may in fact start to rise by the end of next year, while US interest rates are currently forecast to stay low even longer, dampening dollar prospects.

John Mulles of Global Reach Partners, a forex specialist, said: "Can the bank of England really ignore the green shoots in the UK economy. If they can't, then it is likely the pound could strengthen further."

The economic issues that continue to bubble in the Eurozone could also help to support the pound against the euro longer term.