How will the General Election affect the pound?

Is the pound weak or strong right now?

Theresa May’s announcement of a snap general election pushed the pound up by around 1pc last week against the dollar and the euro, breaking sterling out of the low band in which it had been trading since October 2016.

But despite that rise last week, it is relatively weak.

Sterling is trading at $1.28 and at €1.18, down roughly 12pc against the dollar and 10pc against the euro compared with its position 12 months ago.

Why does it keep moving?

Sterling fell after the EU referendum then fell again in October when markets accepted that Britain really is going to leave the EU.

That has a range of causes.

One is that markets may expect the UK economy to grow more slowly after Brexit, and so make the UK a less attractive place to keep money - though growth since the referendum has been far more robust than anticipated.

Another is that markets think Brexit will make exporting from the UK more expensive and difficult, and so the pound falls to compensate for that.

A third possible factor is that uncertainty means investors simply do not know whether the UK will be a good choice or not and so need to be enticed to hold sterling assets - and the pound has fallen to reflect that, cutting the price of UK investments for international buyers.

The moves since then reflect those expectations.

When Theresa May set out her plans for triggering Article 50, the pound fell further as Brexit came into sight.

Yet markets also welcomed the new election which is expected to give Theresa May greater authority to negotiate the terms of leaving the EU. That is because a bigger Conservative majority would make Brexit - and other elements of government - more predictable and less subject to the ravages of small, vocal groups in parliament undermining the Prime Minister’s majority.

As a result a substantial majority should act as a buffer reinforcing sterling's value in the years ahead. So if the Conservatives tumble in the polls, expect some volatility in the foreign exchange markets.

The vote will also change little on the continent, as the EU leaders on the other end of the negotiation have voters of their own to worry about, so difficult negotiations could lead to choppy currency valuations too.

• Reader offer: Get competitive exchange rates and your first month of transfers FREE with Telegraph's Corporate International Money Transfer Service.

What does it mean for the economy?

There is no objectively ‘ideal’ level of sterling overall - the price of the pound is determined by supply and demand.

That is not to say that there are not winners and losers at different levels, however.

First the winners. Britain’s exporters have seen something of a gold rush from the weaker pound, as their sales abroad are suddenly worth an extra 10pc to 15pc when the proceeds are translated into sterling.

That can be used either to cut prices overseas to become more competitive, or can be banked as extra profits.

There is evidence that this has happened with official data showing exporting manufacturers’ turnover spiking, and surveys indicating that businesses are ramping up output to meet the extra demand - though other factors are also involved as the global economy is performing well.

There are also losers, however.

Businesses which import components and raw materials are suffering from higher costs as they pay extra to buy the goods from abroad.

Retailers too feel the pinch, particularly when importing perishable goods such as foodstuffs from abroad.

Inflation has picked up since the pound fell, with prices up 2.3pc on the year - matching wages and so threatening to end a period of growth in living standards, and to slow the economy overall.

It also makes the UK a less attractive place for foreign workers as their wages in sterling now translate to rather less in their home currencies.

What about other currencies?

A very good question.

No currency operates in isolation - its strength is a relative concept, determined by the price at which the pound trades against other currencies.

The euro rose after the first round of the French election, erasing most of sterling’s gains within a week of the announcement of the snap election.

The presence of the centrist, pro-EU Emmanuel Macron in the second round was a relief to markets and polling indicates he will win the Presidency, with a comfortable lead over the Front National’s Marine Le Pen.

Reducing the chance of an anti-euro President pushed the single currency up and so the pound down by more than 1pc against the euro.

Each such political event in the eurozone can have differing effects on the foreign exchange markets, however. If Greece had fallen out of the euro but the other peripheral countries stayed in during the sovereign debt crisis, for example, that could have led to the euro rising and the new Greek currency plummeting.

All things are relative.

Interest rates also affect currencies.

The dollar is particularly strong currently and could rise further depending on the speed of monetary policy tightening in the US.

When the Federal Reserve raised the prospect of reducing the pace of quantitative easing in 2013 it led to the so-called ‘taper tantrum’ as investors around the world flooded back into the US to take advantage of higher interest rates, pushing up the currency.

In the past few months the dollar has also risen on the strength of the economy combined with the anticipation of an economic surge based on tax cuts and spending increases, as well as higher interest rates from the Fed.

Markets expect at least three rate rises, but any more beyond that will push the dollar up even further.

As one currency’s rise means another’s fall, if the euro and dollar both strengthen further then that will put pressure on sterling to weaken again.