Holiday shoppers are looking for the best exchange rates in years

The pound has risen to its highest level in more than two years against the euro and the dollar, which is good news for those looking to buy holiday cash or make international payments.

The pound rose to a high of 1.3382 against the dollar on Tuesday as it looked set to secure a fifth consecutive daily gain. It rose above 1.20 for the first time since April 2022 against the euro.

Rising pound: what it means for holiday shoppers

For those looking to buy travel currency, the best euro exchange rate seems to be with the Wise money card at 1.2008. Note that they charge a sliding fee, which lowers the effective exchange rate to 1.1933. If it's money you're after, TravelFX gives you the rate at 1.1813.

For dollar buyers, the Wise money card will deliver an effective exchange rate (remember we subtract their fee) of 1.3258. TravelFX will deliver your money at a rate of 1.3195.

Will the pound continue to rise and offer even higher rates? Right now, it looks like this is possible, as a lot has been lined up for the currency in 2024.

How interest rates affect the pound

The most significant development has been the Bank of England's withdrawal from cutting interest rates as inflation in Britain remains stubbornly high. If it lowers interest rates too quickly, it risks raising them again.

But a side effect of higher interest rates is strong demand for UK bonds and other assets by foreign investors looking for good returns. This creates an inflow that supports the pound.

GBP/USD experienced a decline last week when the Federal Reserve finally intervened and lowered interest rates, assuming that the US economy was starting to slow down and that inflation had been moderated.

This means that the UK central bank's interest rate is now higher than that of the US, which has strengthened the pound against the dollar.

The economic challenges of the eurozone and their impact on exchange rates

If we turn to the euro, the news this week has not been very supportive as it is clear that the Euro Area economy is likely to deteriorate.

The PMI survey released on Monday showed a sharp decline in activity in September and will raise the alarm in Frankfurt, where the European Central Bank will consider cutting interest rates again in October.

This will be the third rate cut by the ECB and puts it ahead of the Bank of England.

In contrast, UK PMIs showed the British economy remained on a growth path in September with continued signs of inflationary pressures. This will keep the Bank of England on hold until November and support UK bond yields.

The performance of the UK economy relative to the Euro Area proves a strong narrative for currency traders and explains the pound's jump against the euro.

Could the pound rally lose steam? What do the experts say?

Although the backdrop supports some of the pound's gains, it should be remembered that currencies never move in straight lines. The possibility of a reversal increases on the day some analysts warn the rally means the pound is overbought.

However, the weakness should be minimal, for now at least.