In the News Teaching Activity – what has been happening to the sterling exchange rate? (Feb 2024)

The exchange rate is only in the news when there is a newsworthy dramatic movement, but even a gentle trend can have economic impacts. Here is a helpful update!

The Sterling Exchange Rate Index (SERI) appreciated by 0.6% between December 2023 and January 2024, marking a 5.1% increase from the same period the previous year. Despite being 22.1% below its peak in January 2007, the pound rose 0.4% against the dollar in January, reaching $1.43 – its highest since the 2016 EU referendum. Against the Euro, it also increased in value by 0.4%, spurred by weak Eurozone retail sales. With ECB interest rate cuts potentially imminent, the pound's appreciation against the euro may continue in 2024, impacting the UK economy, though this will also depend on the Bank of England’s future base rate decisions. The current global geopolitical situations make it harder to be sure what will happen to the Sterling index over the next few months and interest rates changes are one of many factors that affect the £’s value.

Exchange rates: Key Economic Indicators - House of Commons Library (parliament.uk)

1 What is the Sterling Exchange Rate Index? The £ floats against other currencies – what does this mean?

2 The Sterling Exchange Rate Index has appreciated by 5.1% in the year to Jan 2024. Ceteris paribus, what impact would you expect this to have on economic growth, unemployment and inflation?

3 Discuss how future interest rate decisions made by the ECB and Bank of England might influence the future trend in the £’s value against the euro.