Currency – British Pound (GBP)

education-icon_poundThe United Kingdom is a member of the European Union but not part of the eurozone. Therefore it does not use the Euro but uses its own currency, which is the British pound, also known as sterling.

The UK is the third largest economy in Europe after Germany and France. London is a major financial center so therefore the British pound is considered to be a very liquid currency. The GBP/USD is a very actively traded currency pair. The GBP is also very active in the crosses. Since the EU is the UK’s largest trading partner, traders take a particular interest in any movements in the EUR/GBP for pointers on the fundamental direction of the currency.

Important Economic Indicators to Follow

Purchasing Managers Index (PMI)

A good indicator of business conditions since it is a survey of business managers. A number above 50 indicates expansion, while below 50 shows contraction.

It should also be taken into account that the UK economy is a service based economy, so any changes in service sector PMI data (Purchasing Managers Index) has an effect on the value of the currency.

Gross Domestic Product (GDP)

A good indication of the state of the UK economy, showing whether there is growth or contraction.

Unemployment Rate

A good indicator of future spending in the economy, which usually helps an economy grow.

Gfk Consumer Confidence report

It measures consumer confidence about current and future economic conditions in the UK and is a good indicator of future consumer spending, which is healthy for economic growth.

Consumer Price Index (CPI)

The change in prices of consumer goods is a good measure of inflation which the Bank of England will closely watch in order to set monetary policy.

Bank of England Policy Announcements

The Bank of England (BOE) sets fiscal and monetary policy in the UK. If the central bank raises the benchmark interest rate, this will tend to lift the British pound. On the other hand, if rates are cut, this will usually weaken the pound.

If the BOE needs to undertake monetary policy changes to stimulate the economy, they will adopt quantitative easing measures and inject more money into the system by increasing bond purchases. This tends to weaken the pound.

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