Let us assume the £ has appreciated against the Euro. Why would the £ appreciate:
Basically it involves more demand for Sterling:
- Higher interest rates in the UK. This makes it more attractive to save in the UK, causing hot money flows
- Lower inflation in the UK. This makes British goods comparatively more competitive, increasing demand.
- Increased productivity and attractiveness of goods.
- Speculation. People feel the £ is likely to appreciate in the future
- Current account surplus. not actually the case, but it would be more likely to cause an appreciation