The United Kingdom is a powerful economic force in the world. It is the sixth-largest economy and the second-largest in Europe after Germany. Its history shows that it is a country to be reckoned with on the global stage.
The United Kingdom is a net importer of goods with consistent trade deficits. Its largest trading partner, Germany shouldn’t come as much surprise because it’s right next door across the English Channel from England! Trade activity between them accounts for over half (51%)of all UK exports and imports respectively.
UK Monetary & Fiscal Policy
The Bank of England was founded in 1694 to help facilitate trade and economic growth for England. Today, its main monetary policy objective is maintaining price stability while at the same time fostering employment by trying not to exceed 2% inflation with the consumer prices index (CPI).
Interest rates in England are called “the bank repo rate.” The Monetary Policy Committee (MPC) meets every month to decide what levels of interest will be charged on loans and mortgages.
The MPC uses two main policy tools — bank repos and open market operations — to control inflation or stimulate growth in the economy. The MPC can change these rates at any time, which will ultimately affect spending and borrowing patterns. In terms of open market operations, the MPC purchases and sells Sterling-denominated debt securities to control the money supply. Essentially, they either stimulate or throttle down economic growth. They do this by buying government securities and corporate debt to inject new cash into the economy through purchases on financial markets, but they also have the power to take away money from circulation if necessary through selling these same items at any time
The Great Britain Pound
It’s the pound… but in currency pairs, the GBPUSD is called the Cable, and GBPJPY is called the Guppy.
The GBP/USD is one of the most liquid currency pairs in the forex market. Why? Well, London has long been a major financial center and it’s no surprise that many transactions are happening every day between companies based here or moving money into or out of this country.
With all these big movements going on throughout Europe each trading session, you’d expect spreads to widen just slightly more than other less significant currencies; however,they don’t change much at all. GBPUSD only comprises 14% of global trades, the third most active pair — which is why spreads are pretty tight, just a pip or two more than EURUSD or USDJPY.
Agile in London Session (But Volatile)
The London session is when things heat up, with GBP/USD trading volume highest during European hours. There’s potential for strong moves in New York as key UK and US data will be released then too! There isn’t much movement in the Asian trading sessions though.
Just know that GBP pairs are given to volatile and jerky moves, as liquidity grows thin at certain points of the day. Also, GBP pairs react strongly to surprise economic data.
Important Economic Indicators for the GBP
Consumer Price Index: The CPI is one of the most important economic indicators for traders who are looking to trade GBP pairs. This index measures the change in prices of a basket of goods and services that are typically purchased by consumers. When the CPI rises, it indicates that inflation is increasing, which can lead to higher interest rates. This can cause the value of the pound to decline relative to other currencies.
Unemployment Rate: This index measures the percentage of people who are unemployed and actively seeking employment. When the UK unemployment rate rises, it can indicate that the economy is struggling and that the pound may be devalued relative to other currencies.
Gross Domestic Product (GDP): This index measures the total value of all goods and services produced by a country over some time. When the UK GDP rises, it indicates that the economy is growing and that the pound may be worth more relative to other currencies. When the UK GDP falls, it indicates that the economy is contracting and that the pound may be worth less relative to other currencies.
UK Purchasing Managers Index (PMI): This index measures the level of optimism or pessimism that purchasing managers have about the economy. When the PMI rises, it indicates that the economy is growing and that the pound may be worth more relative to other currencies. When the PMI falls, it indicates that the economy is contracting and that the pound may be worth less relative to other currencies.
GFK Consumer Confidence Report: This index measures the level of optimism or pessimism that consumers have about the economy. When the GFK consumer confidence report rises, it indicates that the economy is growing and that the pound may be worth more relative to other currencies. When the GFK consumer confidence report falls, it indicates that the economy is contracting and that the pound may be worth less relative to other currencies.
What Moves the GBP
Shifts in Monetary Policy
Monetary policy is one of the most important factors that move the price of GBP in forex trading. When the Bank of England (BOE) announces changes to its monetary policy, it can cause the value of the pound to rise or fall relative to other currencies.
The BOE typically uses monetary policy to control inflation and stimulate economic growth. When the BOE raises interest rates, it can cause the pound to appreciate relative to other currencies. This is because higher interest rates make investing in the UK currency more attractive, leading to increased demand for pounds.
Conversely, when the BOE lowers interest rates, it can cause the pound to depreciate relative to other currencies. This is because lower interest rates make investing in other currencies more attractive, leading to increased demand for those currencies and a decrease in demand for pounds.
Developments in the EU or USA
The UK is closely linked to the economies of the EU and USA, so any major developments in those economies can have a significant impact on the price of GBP in forex trading.
For example, if there is a major recession in the USA, it can lead to a decrease in demand for British goods and services, which can cause the pound to depreciate relative to other currencies. Alternatively, if there is news that the EU is adopting new policies that are favorable to the UK economy, it can lead to an increase in demand for British goods and services, which can cause the pound to appreciate relative to other currencies.
The GBP can be affected by risk sentiment in forex trading in several ways. The GBP benefits from the fact that it has a higher interest rate than other major currencies. This makes it more attractive to investors, which can lead to an increase in demand for the currency. When traders want to sell their high-yielding investments and look for a more stable currency, they will start selling off the GBP in search of the USD.
Disclaimer: All information provided here is intended solely for study purposes related to trading financial markets and does not serve in any way as a specific investment recommendation, business recommendation, investment opportunity, analysis, or similar general recommendation regarding the trading of investment instruments. The content, in its entirety or parts, is the sole opinion of SurgeTrader and is intended for educational purposes only. The historical results and/or track record does not imply that the same progress is replicable and does not guarantee profits or future profitable trading records or any promises whatsoever. Trading in financial markets is a high-risk activity and it is advised not to risk more than one can afford to lose.