Forex traders love to trade the GBP because of its liquidity. One of the reasons for the Cable Sterling’s liquidity is the country’s highly developed capital markets. Many foreign investors seeking investment opportunities other than the US have sent their funds to the UK. In order to create these investments, foreigners need to sell their local currency and buy GBP.
Quick Currency Facts About The GBP
- GBP/USD is one of the most liquid currency pairs in the world.
- According to CNN, the United Kingdom is the world’s fifth largest economy with GDP valued at over $2.9 trillion (USD) in 2015.
- The UK has a service-oriented economy, with manufacturing representing an increasingly smaller portion of GDP.
- The UK capital market systems are one of the most developed in the world, and as a result finance and banking have become the strongest contributors to GDP.
- Although the majority of the UK’s GDP is from services, it is important to know that they are also one of the largest producers and exporters of natural gas in the EU. That means that changes in energy prices (such as oil), will significantly affect the large number of UK oil exporters.
A Few Key GBP Events to Follow
GBP Interest Rate Decision
Interest rates are set by the Bank of England’s (BOE) Monetary Policy Committee (MPC). The MPC is a nine-member committee that sets monetary policy for the UK. It consists of a Governor, two Deputy Governors, two executive directors of the central bank and four outside experts. The committee was granted operational independence in setting monetary policy in 1997. Despite this independence, their monetary policies are centered around achieving an inflation target dictated by the Treasury Chancellor.
Typically, if the BoE raises interest rates, this is bullish for the GBP. Conversely, if they decide instead to keep interest rates the same or reduces the interest rate, this is usually considered bearish for the GBP.
Consumer Price Index (CPI)
This index, released by the National Statistics, measures price movements as a comparison between the retail prices of a representative shopping basket of goods and services. The CPI is seen as a key indicator to measure inflation and changes in purchasing trends. Normally, a high CPI reading is bullish for the GBP. A low CPI reading is bearish for the GBP.
Gross Domestic Product
Also released by the National Statistics, the GDP measures the total value of all goods and services produced by the UK, and is therefore considered a wide-ranging gauge of the UK economic activity. Overall, a climbing trend has a bullish result on the GBP, while a dropping trend is seen as having a bearish outcome on the GBP.
Since the UK interest rate or bank repo rate is the primary tool used in monetary policy, it is important to keep abreast
of potential changes to the interest rate. Comments from government officials is one way to gauge biases for potential
rate changes, but the BoE is one of the only central banks that require members of the Monetary Policy Committee to publish their voting records.
This personal accountability indicates that comments by individual committee members represent their own opinions and not that of the BoE. Therefore, it is necessary to look for other indication of potential BoE rate movements. The 3-Month Euro sterling futures reflect market expectations on eurosterling interest rates 3 months into the future. These contracts are also useful in predicting UK interest rate changes, which will ultimately affect the GBP.
This monthly survey published by the National Statistics divides the working-age population into three separate classifications: employed, unemployed and not in the labor force, and to provide descriptive and explanatory data on each of these categories. Data from the survey provides market participants with information on major labor market trends such as shifts in employment across industrial sectors, hours worked, labor force participation and unemployment rates. The timeliness of the survey makes it a closely watched statistic by the currency markets as it is a good barometer of the strength of the UK economy.
Other important events to watch for is when the Governor of the Bank of England and Chairman of the MPC Committee speaks. Further, remarks by the Prime Ministor and Treasury Chancellor should also be watched and can impact the GBP.
Trading the GBP
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