What is an exchange rate?
In short
An exchange rate is the price of one currency in terms of another: how many dollars, euros, or yen you get for a pound.
In plain words
Rates for the pound against the dollar and the euro move through the day as banks, firms, and investors trade. If the pound strengthens, one pound buys more foreign currency. If it weakens, it buys less. The rate on the news is a wholesale rate. A bureau de change or a card provider takes a margin, so holiday money is a little worse than the headline.
A simple example
You are going to Spain. At £1 to €1.15, a €115 hotel night costs about £100 before fees. If the pound falls to €1.05, the same room costs about £110. Nothing in the hotel changed. The currency did. A UK firm that imports parts priced in dollars feels the same squeeze. A UK firm that is paid in dollars receives more pounds when the pound is weaker.
Why it matters
A weaker pound makes imports dearer, which can feed into shop prices and inflation, and it makes exports cheaper for foreign buyers. A stronger pound does the reverse: cheaper imports and foreign holidays, but a harder time for exporters. The Bank of England does not target the exchange rate directly, but the pound affects the inflation it does target. Large moves also change the value of overseas savings and debts.
Easy to mix up
A strong pound is not good for everyone. Exporters, and places that rely on foreign visitors, can lose from it. A weak pound is not, by itself, a verdict that the economy is failing. It can reflect interest rates, inflation, or politics, here or abroad. And the rate is not the cost of living. What your money buys abroad also depends on prices in that country.