The Strong Pound

Over the past year, sterling has jumped ahead of many other currencies, gaining 13% against the dollar and 10% against the euro, according to the BBC. It is also stronger against emerging market currencies, with the pound strengthening 24% against the Turkish lira. Whilst investors can take advantage of these cheap currencies when investing in emerging markets, caution should be taken, as this market can be extremely unpredictable.

UK

A report by accountancy firm EY announced that GDP growth for the second quarter of the year was 0.8%, the sixth consecutive quarter of growth. However many FTSE 100 firms, which make around 80% of their revenue through overseas currencies, issued profit warnings during the last quarter of the year.

A very high majority (40% in fact) of the FTSE 100 companies pay out dividends in dollars, and many are now under pressure because of the recent strength of the pound, so it is definitely worth finding out how your dividends are paid, and whether they will be affected.

FE Trustnet have reported that the “strength of the pound is hitting dividends”, and only investors in closed-ended funds can expect payouts to increase.

It's not all bad news though. Petrol, for example, which is priced in dollars, is cheaper for the UK to import, meaning that on the flip side importing can be beneficial to British companies.

The Office of National Statistics has published figures showing the economy is now worth 0.2% more than it was at its peak in 2008. They reported that the service sector is the only one to pass its previous peak, but this does equate to 80% of UK output.

According to the International Money Fund (IMF), the economy is forecast to be the fastest growing among the G7 developed nations, and the IMF also predicted the UK would expand by 3.2% this year, up from the previous forecast of 2.8%. By contrast, the European Central Bank has recently cut interest rates into the negative in the hope this will boost the growth for the eurozone.

US

British firms who export abroad are also still feeling the pull on purse strings. Burberry recently explained that the current exchange rate could reduce their 2014 profits by £55m, due to sterling performing better than the dollar. Many other British firms including Royal Mail, Mothercare and BBC Worldwide have also made similar complaints.

It is reported that the US is catching up, with the economy growing by 4% during April-to-June this year. BBC News Business put the success down to the central banks buying bonds in an effort to keep long-­term interest rates low, to encourage spending, rather than saving with businesses and consumers.

Mid-cap funds

William Meadon, fund manager of JPM Claverhouse Investment Trust plc, spoke with FE Trustnet and went on to divulge that mid-cap funds are likely to come under pressure from an earnings and dividend-growth point of view, as well as sectors most exposed to the strengthening of sterling.

In conclusion

If the pound goes through a sustained period of strength against the dollar and other major currencies, this will hurt the UK’s exporters and will have a particularly noticeable effect on the UK’s biggest listed companies because they make a large percentage of their sales overseas.

So with the kids on summer holidays, and the pressure to entertain them setting in, travelling abroad may be an option for many, however this could have a completely different impact on where and when to invest.