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Business Environment Profiles - United Kingdom

Real effective exchange rate

Published: 02 June 2025

Key Metrics

Real effective exchange rate

Total (2026)

85 Index

Annualized Growth 2021-26

1.7 %

Definition of Real effective exchange rate

This report analyses the real effective exchange rate of the Great British pound (GBP). The effective exchange rate measures the trade-weighted value of the pound, calculated by measuring the weighted change across all included exchange rates. The data is sourced from the Bank of England (BoE), in addition to estimates by IBISWorld, and represents annual averages for each financial year (i.e., April through March), expressed in index form where January 2005 is the base (i.e., January 2005 = 100 points). There are two effective exchange rates: the first includes only currencies that account for at least 1% of UK trade; while the second - known as the broad rate - includes all currencies that account for at least 0.5% of UK trade. For the purpose of this report, the broad effective exchange rate is analysed.

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Recent Trends – Real effective exchange rate

In June 2016, the United Kingdom voted to exit the European Union. Following the vote, uncertainty sent ripples through currency trading markets and, ultimately, the pound sterling fell sharply against many major global currencies, including the US dollar and euro - in 2016-17 alone, the real effective exchange rate index declined by some 12.6% year-on-year, the first annual decline since 2011-12 (-0.7%) and the largest since 2008-09 (-14.8%). The real effective exchange rate subsequently remained somewhat depressed, compared against the long-term average, due to the economic instability and uncertainty which has persisted while the nature of future trade agreements with the European Union were negotiated. Yet, following a succession of extensions, the United Kingdom eventually withdrew from the EU bloc on 31 January 2020, mitigating uncertainty with regards to whether or not the United Kingdom would actually leave the bloc. This subsequently marked the start of a transition period through December 2020, during which conclusive terms of the UK's withdrawal were to be negotiated with Brussels in earnest, and on 1 January 2021, the EU-UK Trade and Cooperation Agreement was ratified, confirming the UK's new-found independence. Of course, conditional on how markets now react to the UK's new post-withdrawal relations with the European Union, and dependent on the nature of trade agreements still under discussion with certain nations, this will inevitably have a bearing on movement in the pound sterling exchange rate moving forward - simply, in a downside scenario, the pound could either lose ground or presumably remain in a depressed state against key global currencies going forward, albeit vice versa if the UK market flourishes.

Nevertheless, until the COVID-19 (coronavirus) pandemic sent ripples through currency markets, the rate of depreciation against the euro and US dollar in particular had slowed somewhat - the broad value of the pound sterling even rose, on average and albeit tentatively, in 2018-19 (0.9%) - due to intermittent jumps in the value of the pound. For instance, the pace of UK wage growth without bonuses rose 3.1% in August 2018 – the, at the time, fastest monthly increase since 2009 - instilling a degree of confidence among pound traders. However, currency trader confidence was offset by perceived negativity emerging from EU-exit negotiations, or lack thereof, including the September 2018 leak of "no-deal" EU withdrawal contingency plans, colloquially known as "Operation Yellowhammer", and stalled talks regarding the Irish border. In the early stage of the 2019-20 fiscal year, the value of the pound sterling initially came under significant pressure when Boris Johnson was elected into the role of Prime Minister in July 2019. As the new Prime Minister cemented his administration's stance that only wholesale Brexit renegotiations would stop a "no-deal" exit, coupled with comments emerging from the Cabinet that "no deal" is highly likely, the pound sterling lost ground on global currencies. Subsequently, Brexit-related political turmoil had eased, with the December 2019 general election result effectively, in all but name, confirming the direction Brexit would take going forward. As negotiations continued, the assumption was currency markets would, to a certain extent, correct as a result of investors reacting to the UK's eventual withdrawal from the bloc in January 2020 and a more concrete political backdrop. Currency investors had more transparency with regards to perceived economic prospects; however, the coronavirus pandemic effectively wiped any recent or otherwise indicative gains in the Quid.

On 23 March 2020, the broad value of the pound tumbled to its lowest level on record against the currencies of the UK's major trading partners, as the economic shock caused by the coronavirus pandemic continued to blight trader confidence and rip though currency markets. As per the BoE's daily monitor, the sterling's broad effective exchange rate hit a low of 72.9 points, before exhibiting marked volatility thereafter. Nevertheless, the reading on 23 March 2020 close of trading was a reading weaker than at any time during the Brexit process, the financial crisis era, and even the UK's ejection from the European Exchange Rate Mechanism in 1992. Along with other major currencies, the pound was knocked by a somewhat indicatively surging US dollar as companies and banks had been hoarding "safe haven" greenbacks to pay their debts and keep business flowing during the crisis. The sterling had been made extra vulnerable by the UK's departure from the EU bloc, while a new burst of emergency stimulus and the government's relief package built atop Budget 2020 commitments, also initially turned investors more negative on the pound sterling's prospects. In 2019-20, an initial coronavirus-related shock to currency markets exerted a drag on the value of the pound sterling towards the tail-end of the fiscal year, with the real effective exchange rate index declining by 0.3% over the full financial year.

The coronavirus pandemic sent trembles across the global economy and money markets. With the outbreak effectively accelerating in the United Kingdom in March 2020 and thereafter, the pound endured a volatile period through the first half of the 2020-21 fiscal year amid turmoil for risk assets like stocks and commodities, as well as the currencies that underwrite them. Meanwhile, the pound lost significant ground against key trade currencies due to, initially, a lack of clarity on whether the coronavirus crisis would delay Brexit negotiations and, thereafter, due to intermittent negative news surrounding the UK's handling of the coronavirus crisis, with investors being further incentivised to choose the safety of the US dollar amid both UK and global unrest (e.g., renewed tensions between Washington and Beijing). Some central bankers, however, were of the view that impulsive price action in some currency markets in H1 (April-September) 2020-21 represented an overreaction to the coronavirus on the part of investors, suggesting that stabilisation in the pound sterling would follow.

While the coronavirus situation evolved rapidly, on a near day-by-day basis, currency prices continued to exhibit volatility, largely offsetting any recent pre-coronavirus gains. Yet, in H2 (October-March) 2020-21, the pound sterling exchange rate showed glimmers of hope for recovery, with markets reacting well to: continued and extended financial support for both consumer and business markets, including welcomed measures in Budget 2021; the ongoing rollout of a confirmed coronavirus vaccine with a high efficacy rate; the announcement of the government's four-step roadmap to "offer a route back to a more normal life", which had been in effect since 8 March 2021; the ratification of a conclusive UK-EU trade deal; and other seemingly positive news helping market sentiment to recover to a certain extent. Largely the result of a H2 2020-21 rally, the real effective exchange rate of the pound sterling increased by 0.5% year-on-year in 2020-21, to reach 78.1 points on average. Moreover, the sterling's broad effective exchange rate surpassed 80.0 points on 10 February 2021 (80.1 points), for the first time since 26 February 2020 (80.2 points), and ended the financial year at 81.9 points on 31 March 2021.

Notwithstanding indicative gains toward the tail-end of the 2020-21 fiscal year and heading into 2021-22, however, the real effective exchange rate of the pound sterling remains far below the historical pre-referendum benchmark, an event which has left a seemingly permanent impression on UK currency markets. On 20 September 2021, the BoE reported the pound sterling's broad effective exchange rate to be 81.7 points as of 16 September 2021, a 5.7-point difference compared to 23 June 2016 (87.4 points), the day of the referendum vote. As per the BoE's record for daily spot exchange rates against the pound sterling, £1 at the close of trading on 16 September 2021 returned €1.1719 and US$1.3782, compared to a 52-week high of €1.1815 and US$1.4211 respectively, and relative to a 52-week low of €1.0868 and US$1.2705 respectively. In 2021-22, the sterling's broad effective exchange was 81.7 points on average, up 2.6 points – or 4.6% - year-on-year and improving in tandem with the reopening of the economy and consequent, indicative market recovery.

Over the current year, the real effective exchange rate is expected to decline by 4.4%, with the sterling's broad effective exchange rate forecast to be 78.1 points on average, down 3.6 points. This is because of the significant macroeconomic headwinds the UK economy will face with over the current year. These include rising inflation partially caused by the Ukraine-Russia fuelled energy and supply chain crisis which is set to exceed wage growth. Furthermore, in response to rising inflation, the BoE have raised the official bank rate 0.25%, 0.5%, 0.75%, 1.25% and 1.75% respectively in December 2021, February 2022, March 2022, June 2022 and August 2022. In turn consumer and business confidence is expected to be subdued over the current year, while the BoE have stated that CPI inflation could reach 10% in 2022 with the UK economy likely to enter a recession at the end of the year. All of these headwinds are likely to compound and yield uncertainty among investors surrounding the state of the UK economy. As a result, many investors are likely to turn towards a stronger and more certain safe-haven currencies. Additionally, in September 2022, Chancellor of the Exchequer, Kwasi Kwarteng, announced the UK government's mini-budget outlining plans for an array of tax cuts in order to try and reinvigorate the UK's stalling economy and attempt to counter the increasing inflation. However, this would have been funded by the borrowing on billions of pounds. Hence, the market reacted negatively towards this and the pound depreciated. In response to the misguided government initiatives, the Chancellor and Prime Minister have since been replaced, with the pound appreciating slightly. The real effective exchange rate is estimated to increase at a compound annual rate of 0.2% over the five-year period through 2022-23.

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5-Year Outlook – Real effective exchange rate

If, in the medium-to-long term and emphasis on the "if", the macroeconomic headwinds and coronavi...

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