Recently I noticed that the 1 USD was worth 0.8 GBP and now it’s worth 0.78 GBP. Not much deal to an average consumer. What does that mean for the economy for both countries and what does it tell about the relative strength of both currencies?
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The relative strength of both currencies is determined by things such as demand for those currencies on the global market and differences in interest policies. (On of the) most important, if not the most important factor is the simple economic law of supply and demand. Keep in mind however that the USD is often used as the currency against which other currencies are valued, it is known as the “world reserve currency”. This means that the USD is often used by countries even when neither of them uses the USD themselves, for example when trading oil or natural gas on the world market. Prior to WW2 the British Pound was often used.
So, especially when only comparing a currency to the USD it may seem that the non-USD currency gets stronger (increases in value) of weaker (decreases in value), whereas in fact it is the USD which gets weaker or stronger when more currencies are compared. The world bank uses a weighted average of the values of different currencies (amongst which are the US Dollar, British Pound, Euro, Japanese Yen and Chinese Renminbi) as the base currency against which to trade others.
In general, you can say that a weaker currency will stimulate a country’s export (as their products become cheaper because you get more of their currency for your dollar), while it may make their imports more expensive (as they need more of their currency to purchase dollars on the world market). Though this will obviously help their export, it has downsides too as the price for goods like oil, raw materials and food rises. This will result in higher prices for consumers, causing shortages and inflation (which is just a fancy way of saying your currency is losing value or purchasing power).
Having a stronger currency tends to create more stable markets and reliable development of prices which has long-term economic benefits. Historically it seems that a stable currency benefits a country more than continuing devaluations in attempts to stimulate exports.
Minor changes, like those in your example, are mostly caused by demand and supply, and much like the value of stocks on the stock market it may not always be easy to explain exactly why they went up or down.
Having said all this, keep in mind that the global economy is a very, very difficult subject and what I said are just broad generalizations.
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