From a financial point of view, the British pound sterling (GBP, Pound or Sterling) is one of the most important currencies in the world. It is ranked fourth among its closest competitors considering the trading turnover, and third in the rating of reserve currencies.
Pound plays a huge role in the history of the world economy, because for hundreds of years it dominated the international trade operations, being in the place of what is the US dollar today. Yet, the Second World War has changed many things in the world: the British Empire collapsed and the pound lost its leading position, but its significance is not lost.
Code: GBP
Sign: £
Banknotes: 5, 10, 20, 50, and 1, 100 are rarely used
Coins: pence (singular – penny) – 1, 2, 5, 10, 20, 50, and also £1 and £2
British pound also owns a remarkable place in the history of currency speculations and hedge funds. Since 1990, Britain became a member of the European Exchange Rate Mechanism. The system was aimed at reducing the volatility of exchange rates, to prepare the road for the single European currency. It happened that this system could not provide the claimed benefits. The British economy felt the burden of the recession, and the Bank of England was forced to put in the state's economy enormous means to keep the declared rate.
Speculators, trading on Forex market, among whom was the famous trader George Soros, predicted that the declared rate will collapse as it has already lost stability due to objective economic conditions, and they began to sell the pounds. The result was the rejection of this system by the UK on September 16, 1992. This day went down in history as "Black Wednesday". On this day, George Soros made a profit of over a billion dollars.
Behind the British Pound Sterling is the Bank of England, which has a policy openly aimed at achieving a rate of inflation of 2%.
Economic support of the British currency
Considering the GDP, the UK in 2015 stood on the 5th place in the world ranking. The country's economy was growing in the past 20 years. Only in 2008, the growth rate was affected by global financial crisis and recession. Inflation moved with fluctuations: from 8% a year in the early 90s, to acceptable figures from recent years.
A much more disturbing fact may be the increase of public debt as this has increased since 2008.
Britain is not part of the Eurozone; although a member of the European Union, it keeps a proud sovereignty in matters of maintaining fiscal and monetary policies. The volumes of the globalization of UK’s economy are huge even by the standards of the EU, and London is recognized as the second financial capital of the world. For this reason, companies eager to attract capital, considered the UK as a good alternative to the United States. This helps them avoid the complicated system of working with securities in the United States.
Britain has a leading competitive position in the market of pharmaceutical, aviation and space industries; it also holds one of the leading roles in finance, banking, advertising business and accounting. Although the country's population gets older, Britain has a competitive workforce. The UK has a policy focused on the development of the business sector.
Although the US is the only major trading partner of the UK, the main source of the British import and export is the EU market. It is important to take into consideration that the health of the British economy is heavily influenced by the monetary policy of the European Union and economic conditions in Europe as a whole. The traders who are interested in GBP should monitor the economic performance of the Eurozone as carefully as the news from Great Britain.
What drives the pound?
Among the most important reports influencing GBP includes the following: The statistics of GDP growth, retail sales, industrial production data, inflation and balance of trade. This information is available to users of the Internet and to financial publications like Bloomberg and Wall Street Journal. It is also necessary to pay attention to the statistics of employment, interest rates, and planned central banks meetings. It is useful, in addition, to monitor the flow of news, as natural disasters, elections, movement in government policy, and other events that may have a strong influence.
The Bank of England tries to maintain inflation at 2%. Consequently, the state of the British pound is based on rate decisions and comments that accompany it. Prices for the main raw materials (gas, oil, cereals) also serve as an object of attention of traders, as they may determine signs of the emergence of inflation pressures on the economy.
Britain's economy is one of the most attractive for investment, and the investment volume, by itself, affects the exchange rate. UK increasingly competes with New York to attract capital, which also has an impact on the pound sterling.
Specific factors affecting the pound sterling
Among reserve currencies, the British pound is third in popularity rating. At the same time, the importance attached to the pound often exceeds its real significance on market. Firstly, this is due to the fact that the country has the status of a financial and trading center of Europe, and secondly, the world leadership of UK in all areas for hundreds of years has also an impact.
Britain got a reputation of a country with its monetary policy of conservative nature, which from time to time increases and weakens. It depends which party is in power, and what is the degree of decrease or increase of government spending and transfer payments. It should be noted that the pound is one of the few currencies that is traded above the US dollar.
Conclusion
Since the most part of the models for prediction of exchange rates relates only to small time periods, it is very difficult to guess the subsequent movement of currency pairs. Thus, forecasts based on economic conditions of a state set reliable long-term trends, despite the low popularity among intra-day traders.
The population and area figures are not an advantage for the UK. And yet the country has one of the world's leading economies with a rich history of leadership in the world economy for centuries. United Kingdom found the golden mean between the share of the industrial sector and the service sector of the economy, and the politics aims to achieve stability and predictability. There are reasons to believe that the British pound will keep its role of one of the world's major currencies, and will be one of the main rivals of US dollar.