Sterling isn't faring very well against the Euro just now - so the exchange rate is quite poor. But yes, you can bring sterling and change to Euros with no difficulty.
And - it's Paphos or Pafos but - never Pathos, which is something completely different although I believe it sums up Paphos pretty well
(Not my favourite place in Cyprus).
Yes, there is a water shortage - but I believe the tourist hotels are not being affected.
Have never stayed at Laura Beach hotel but you could try googling for "Laura Beach hotel review" or check out Holiday Truths website for reviews there.
The weather should be nice and pleasant at that time of year. Enjoy!