GBP explained: A guide to Pound Sterling
Introduction to the Pound
The Pound is the national currency of the UK, known by the abbreviation GBP. Its symbol is the Pound sign (£). The Pound is the fourth-most-traded currency on the forex market – accounting for approximately 12.8% of daily turnover, according to 2019 data from the Bank for International Settlements.
Economy of the UK
The UK is the fifth-largest economy in the world by GDP as of May 17 2021, after only the US, China, Japan, and Germany.
The Bank of England is the country’s central bank, which is responsible for overseeing monetary policy and maintaining financial stability.
The history of the UK charts an industrial pioneer responsible for the spread of new technologies and manufacturing protocols across the Empire in centuries past. Today’s economy, however, is services-focused, with its financial services of particular dominance; London is seen as one of the foremost financial centres in the world.
The country has the second-largest aerospace industry in the world, as well as a top-ten global pharmaceuticals sector. The UK is also in the top 20 oil nations in the world by production, although it remains a net importer of the commodity.
What moves the price of the Pound?
There are a variety of factors that influence the price of the Pound against other currencies. These include monetary policy decisions from the Bank of England, macroeconomic releases, and political events, but also cover oil prices and balance of payments (export and import values).
Traders should be aware of BOE meeting dates and the release dates of key reports to help them keep on top of developments. Check out our economic calendar and don’t miss the latest announcements that can move markets.
It’s important to note that while the Pound may be strengthening or weakening, you still have to consider how the other currency in the pair is performing before assessing the reasons for a pair’s moves.
- Monetary policy
Central banks, in this case the Bank of England, oversee monetary policy and increase or decrease interest rates in an attempt to control inflation levels. Higher interest rates tend to stimulate foreign investment, meaning the demand for that particular currency is greater. In turn, this means GBP is likely to strengthen against a basket of other currencies. Lower interest rates, conversely, can have the opposite effect, as investors seek currencies with a more favourable return.
- Macroeconomic data releases
Data releases are capable of conveying fundamental information that may inspire traders to take a position on particular currencies. One key data point is inflation. The Consumer Price Index, which tracks the price of a basket of consumer goods and services over a given period, is a measure used by the BOE for its inflation target. When CPI data deviates from the BOE target, traders may feel that monetary policy changes are coming (see above) that could hit the price of GBP. Excess inflation can devalue a currency considerably.
Other measures to look out for are sentiment, which shows whether traders are net long or short, consumer confidence, which can be a benchmark for the direction of the economy, and GDP itself, the definitive measure of economic activity. A rising GDP also means a strengthening currency, and a falling GDP means a weakening currency. Other measures of how the economy is doing can be found in retail sales, and services and manufacturing PMIs.
- Political events
When the future of a country’s governance is unclear, volatility in its currency can follow suit. The lead-up to the 2019 general election, the EU referendum result, and uncertainty regarding Brexit trade agreements are all instances that caused the Pound to drop in value. However, events such as the decisiveness of the majority Conservative victory in 2019 exemplified the manner in which GBP is capable of surging higher.
A brief history of the British Pound
The British Pound is the oldest currency on the planet still in use. With a history spanning some 1,200 years, it goes back to Anglo-Saxon times when one pound in currency was equivalent to one pound in weight of silver, and was split into 240 silver pence.
Through the centuries the silver content reduced, and new denominations were introduced. The Gold Standard replaced silver in 1816, although paper money was introduced following the founding of the Bank of England in 1694.
In more recent times a key development for the Pound came in 1940 with the Bretton Woods agreement, which pegged the Pound to the US Dollar at a rate of £1 = $4.03. The Pound was then changed to a free-floating currency from August 1971 onwards.
Popular Pound currency pairs
GBP/USD is the forex ticker for the exchange rate between the British Pound and US Dollar – the pair is also known as Cable. It tells traders how many US Dollars are needed to buy one Pound in real time.
Cable is consistently in the top five most traded currency pairs globally, and as of latest stats it is the third-most-traded – representing approximately 11% of all forex trades by volume.
When trading Cable, market practitioners should be aware that GBP/USD tends to rise in times of UK inflation being consistently lower than that of the US. Cable also frequently rises when UK interest rates rise more than those of the US. This could happen, for example, when the BOE raises rates and the Federal Reserve does not.
GBP/JPY is the forex ticker for the exchange rate between the British Pound and the Japanese Yen – the pair is also known as The Dragon. It tells traders how many Japanese Yen are needed to buy one Pound in real time.
The Dragon is not a pair traded in huge volume compared to some others, but still makes up 4% of all forex trades by volume. The pair should be approached with caution as it is known for its volatility; it can move up to 200 pips in a single day. Accordingly, while traders should always apply diligent risk management practices, including carefully thought-out stops and limits, with this pair it is especially important. Stops might be set wider than normal due to the Dragon’s propensity to move quickly.
When trading GBP/JPY, traders may be interested in breakout strategies which aim to profit from price breaking through key support or resistance levels. Due to the magnitude of the moves GBP/JPY is capable of, this sort of momentum can be profitable – but beware the considerable risks of taking this approach.
EUR/GBP is the forex ticker for the exchange rate between the Euro and the British Pound. It tells traders how many British Pounds are needed to buy one Euro in real time.
EUR/GBP makes up around 3% of all forex trades by volume. Encompassing the Eurozone and the UK economies, traders will need to consider fundamental factors surrounding the European Central Bank, such as ECB interest rate decisions, as well as those BOE releases capable of moving price. EUR/GBP is regarded as a highly-liquid currency but isn’t generally known for high volatility, meaning it may be less susceptible to sudden and large price shifts.
Pound Sterling trading hours
The British Pound is available to trade 24 hours a day, five days a week – from 10pm (GMT) on Sunday evening to 10pm (GMT) on Friday night.
The best time of day to trade GBP will depend on which pairing you decide to focus on. As a rule, each pair will see the most movement when its sessions overlap. For example, the GBP/JPY pair would be more highly traded when both the London and Tokyo forex sessions overlap.
Start trading Pound pairs
You can trade the British Pound against other major currencies such as the US Dollar, Euro, and Japanese Yen, as well as 80+ other pairs, via CFDs. Take your position on whether forex prices will rise or fall in the future, without having to buy the underlying asset.