"A weak currency is the sign of a weak economy, which is the sign of a weak government."

Gordon Brown has oft been reminded of his jibe to John Major in 1992, so the recent rally by the pound will have no doubt gone down well in Downing Street. Sterling has risen sharply against a basket of currencies in recent weeks and is up 17% from its low against the US dollar and 11% against the euro.

Many see it as a sign that the UK economy is, if not quite yet on the road to recovery, not far from it. At the very least, so the theory goes, the worst of the recession is behind us and the rate of decline is slowing. But as is so often the case when there is talk of "green shoots" and recoveries, some perspective is needed.

The pound has bounced from its low against the greenback of $1.35 in March to $1.5894 today. But it is still more than 20% off its peak of around $2 a year ago. Similarly, against the single currency, sterling is up from close to parity at €1.137 but nowhere near last year's peak of €1.35.

Holidays are certainly cheaper this half term than they were over Christmas and New Year, but they are still considerably more expensive than they were 12 months or so ago.

The weak pound is, of course, good news for exporters, who are undoubtedly suffering because of the global nature of the downturn, but not as much as they might be given the relatively low cost of UK goods and services for overseas buyers.

So where will sterling go from here? Just as its strength was probably overplayed last year, so its weakness probably was over the autumn and winter.

The recovery since then has been about much more than the odd green shoot appearing here and there in the economy and over-excited talk of a recovery. Relative levels of interest rates around the world have stopped working against the pound. Since the final quarter of last year, the Bank of England cut rates from 5% to an all-time low of 0.5%, driving sterling down.

Now that rates have no further to fall, this no longer applies. There are concerns about the impact of quantitative easing, or printing money, but other nations are taking similar steps and if (and that's a big "if") it stimulates growth and staves off a lengthy period of deflation as planned, it should be positive for the UK economy and therefore the pound.

The appetite for risk among investors has rebounded since March leading to a significant recovery in financial stocks and therefore the pound, given the importance of the City to the UK economy. It has also removed support for the dollar, which, as the major world currency, was seen as a safe haven during the financial meltdown of last autumn when institutions such as Lehman Brothers, Merrill Lynch and AIG were going to the wall.

The pound suffered in particular - as seen by its fall against other currencies such as the euro - because the UK was at the time seen as the sick man of Europe. But it has since dawned on investors that things are just as bad in many of the other major economies, particularly in Europe. The UK entered recession first and has done more to combat the downturn than the eurozone. The pound could benefit from the single currency's weakness should the recession on the continent last longer than here. Many economists believe it is the euro which is likely to come under the most pressure this year and next rather than the pound or the dollar.

This is not to say it is all plain sailing for the pound. There are significant risks associated with quantitative easing and the financial sector remains in the mire. Investors are nervous and stocks are volatile and it will only take a couple of shocks to upset the apple cart.

The public finances are also in disarray - a fact that was highlighted in no uncertain terms last week when Standard & Poor's cut its outlook for the UK from "stable" to "negative" and warned there was a one-in-three chance it will lose its AAA credit rating.

The pound lost nearly 2% of its value in a matter of minutes, so just imagine (or, on second thoughts, don't) what would happen if S&P did cut the UK's rating and put it on a par with broken economies like Ireland, Greece, Portugal and Spain.

Again some perspective is needed. If the UK's credit rating is under threat, then so to is that of the US and eurozone, where government debts are also ballooning. The dollar tanked at the end of last week on speculation it will be the US, and not the UK, that gets its credit rating hammered. Barring any UK-specific financial or economic shocks, which of course cannot be ruled out in the current environment, there is good reason to think that sterling can hold on to much of its recent gains.

But given that much of this is due to the weakness of so many other currencies, rather than sterling strength, a return to the heady days of last summer is a long way off.