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The British pound, also known as sterling, is one of the more popular currencies in the forex market.it It is the local currency of the United Kingdom, and is the oldest actively traded currency in the market. Let’s see what factors affect its movements.
Gross Domestic Product
The aggregate economic activity in the United Kingdom is a key consideration when gauging the strength of the British pound. As a trader, you should be aware of three different economic reports:
- Preliminary GDP
- Revised GDP
- Final GDP
The prelim GDP is the earliest release. It usually has the biggest impact since it gives traders a first look into the economic health of the UK. It’s also the least accurate, tending to be revised in the follow-up Revised GDP and Final GDP.
Consumer Confidence and Sentiment
For fundamental traders, surveys that measure market sentiment are another important tool. Confidence and Sentiment reports are very important in the UK because participants want to know whether the majority of the people are optimistic about the economy or otherwise.
The changes and the magnitude of those changes can be crucial to detecting shifting trends in the underlying economy and therefore in the movements of the British pound.
In order to gauge consumer confidence in the UK, consumers usually follow the Gfk Consumer Confidence and the Nationwide Consumer Confidence Index (NCCI) reports.
Inflation
The price and inflation play an important role in the movements of the sterling. Generally, countries sporting high inflation levels usually have currencies that depreciate against other currencies. In order to rein on these effects, central banks usually need to raise interest rates.
Traders usually use the Consumer Price Index (CPI), compiled and published by the Office for National Statistics. This metric determines the changes in the prices of goods and services bought by consumers in a given period.
This metric is vital since the Bank of England (BOE) use it for its inflation target. Changes in the CPI that deviate from the BOE’s inflation target could mean future monetary policy action that could substantially affect the British pound.
Monetary Policy
The Bank of England obviously plays many roles. One of its core mandates is to promote monetary stability defined by the bank as “low inflation and confidence in the currency.” That means if the BOE feels that the inflation is nearing a level that’s not helpful for the pound, the bank will utilize its monetary tools to control inflation, as mentioned above. Meanwhile, traders try their best to predict these monetary policies, such as interest rate changes.
In order to follow monetary policy, traders usually keep close tabs of changes in the bank rate, which is the interest charge that banks charge other banks on the balances held at the BOE. The rate decision is managed by the Monetary Policy Committee (MPC) on a monthly basis. You can find it on the Bank of England website.
Balance of Payments
The Balance of Payments (BoP) for a country is an accounting record of its interaction with the rest of the world. The BoP is made up of 3 accounts. However, the current account is what traders are mostly searching for.
The current account tells how much a country is exporting and importing, and the flow of income payments and transfer payments. Generally, a current account surplus is positive for the currency since it means that more capital is flowing into the currency than what is leaving.
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