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WIKI ANALYSIS
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This article describes a currency traded on the global foreign exchange market. View articles referencing this currency. |
The British Pound (officially Pound Sterling, abbreviated GBP for Great British Pound) is the currency of the United Kingdom, its Crown dependencies (the Isle of Man and the Channel Islands) and the British Overseas Territories of South Georgia and the South Sandwich Islands, British Antarctic Territory and British Indian Ocean Territory. It is the fourth most traded currency in the foreign exchange market behind the American dollar, the Euro, and the Japanese Yen.[1] Denominations are denoted with a leading £. For example, £40 reads "Forty Pounds Sterling" or "Forty Pounds". Its fractional values (measured in hundredths of a pound) are called "pence".
The pound sterling (GBP) traded against the U.S. Dollar (USD) is often referred to as "cable". This term was adopted in the days when the only means of trading communication between London and New York was through the telegraph cable.
The chart at left shows the GBP/USD currency pair; the number of U.S. Dollar (USD) equivalent to 1 British Pound
History
The pound sterling is the world's oldest active currency with origins that date back to Anglo Saxon and Medieval periods.[2] During its earliest incarnation, the pound came in forms of gold and silver; however, with the inception of the Bank of England in 1694, the British pound became a modern, paper currency.[3] Beginning in 1816, the pound followed the gold standard, which meant the value of the paper British pound notes was backed by available gold reserves.[4]
In response to the devaluation of its currency as a result of the Depression and two world wars, in 1940, the British government changed this policy and instead, pegged its value to that of the U.S. dollar at a rate of £1 = $4.03.[5] On September 19, 1949, however, the British government devalued the pound further to £1 = $2.80 in a reaction to continued economic pressure. [6] Pegging currencies to the dollar during this time was common among major industrial states and became known as the Bretton Woods system after an agreement was struck for monetary relations among nation-states in Bretton Woods, New Hampshire in 1944.
In June of 1972, the British government decided to float the British pound, rather than keep it pegged to the U.S. dollar, in a move to curb rising inflation during that time.[7] At the time, the British Chancellor, Anthony Barber, heralded floatation as a temporary fix; however, the British pound has remained floated ever since.[7]
Factors effecting the value of the Pound
Since becoming a floated currency, the value of the British Pound is driven by supply and demand for the currency. Currency supply and demand are driven by central bank's monetary policy, interest rates, and the overall health of the British economy.
Bank of England
The Bank of England is the central bank for the U.K. and is in charge of managing monetary policy for the country. The bank's main powers for managing the value of the pound are the management of base interest rates and the ability to print new bank notes.
Interest Rates
Interest rates help determine the demand for a currency. At high interest rates, the currency becomes more valuable as it offers a return on investment for investors. When interest rates are lowered, investors look to exit the currency and find higher returns elsewhere. Historically, the British pound has been one of the higher value foreign currencies, partly due to the country's high base interest rate. For most of the past decade (1997-2008), the base interest rate remained above 4%; however, since the 2008 Financial Crisis, this trend has changed. In response to an ensuing recession, the Bank of Europe cut rates to their lowest levels in a decade to 3%.[8]
Current Account Balance
The current account is a function of trade balance (exports minus imports), income from abroad (such as dividends, income by foreign subsidiaries etc.) and other transfers (such as foreign aid and grants).
The UK's monthly trade deficit has generally increased since the mid-1990s -- meaning, the country has consistently and increasingly imported more than it has exported. During the mid-1990s, the country had a trade deficit of approximately £ 1 billion; however, in July 2008 the country recorded the greatest monthly trade deficit since the UK began keeping records back in 1697 with a deficit of £ 8.238 billion.[9][10]
Investing in the Pound
An investor can invest in the pound by buying an asset and holding it. Currencies, as an asset class, do not produce any returns by themselves; however, by purchasing an asset in that currency you can profit off the asset and fluctuations in the currency. Investors can also buy and sell pound futures traded at the Chicago Mercantile Exchange. Futures are better instruments for speculation since they are leveraged and more sensitive to currency movements.
Companies that benefit from a stronger pound
Companies that import their raw materials from abroad will benefit form a stronger pound.
- Tesco (TESO) - Tesco is essentially the Wal-Mart (WMT) of Europe with manufacturing in China and sales in the UK and European Union
- Banking companies should also generally benefit from a stronger pound
Companies that benefit from a weaker pound
Many British companies report their earnings and dividends in dollars so a falling pound against a rising dollar benefits their balance sheets. For every 10 % fall in the value of the pound against the dollar, the dollar adds nearly 4% to UK dividend growth.[11] The following British companies report their earnings in dollars:
- BP (BP)
- Royal Dutch Shell (RDS'A)
- Rio Tinto (RTP)
- BHP Billiton (BHP)
- HSBC Holdings (HBC)
- Standard Chartered PLC (STAN-LN)
Companies that generate a decent portion of their revenue through exports will benefit from a weakened pound. These companies include:
- AstraZeneca (AZN) and GlaxoSmithKline (GSK) both generate 45% of their revenue in the U.S.[12]
Forex Markets [13]
Trading Hours
The most active GBP trading hours are from London's opening market hours (3:00AM ET / 8:00 GMT), UK Economic news (4:30AM ET / 9:30 GMT) and the typical time of release for U.S. Economic news (8:30AM ET/ 13:30 GMT).[13]
Key Currency Crosses
The 3 key currency crosses are
- EUR/GBP
- GBP/CHF
- GBP/JPY
Things to know when trading The British Pound (GBP)
The following 5 minute chart illustrates a common behavior of the GBP/USD where it will move rapidly in one direction at the market open only to give up that move and turn a new trend shortly thereafter.
Nicknames – The British pound has 3 nicknames. The pound sterling is actually the full official name of the currency and this name is oftentimes abbreviated to just “pound” or “sterling.” There is no exact origin for the name, but many people say that it came from the Anglo-Saxon times when coins were made from silver and called sterlings and payment would be made in “pounds of sterlings.” The term Cable was coined by NY and London foreign exchange traders who use to transact via a transatlantic undersea cable.
Central Bank - The Bank of England conducts monetary policy meetings 12 times a year and their decisions on interest rates could have significant ramifications for the currency market. Mervyn King current serves as the Governor of the Bank of England. His term can last as long as 10 years.
Most Active Trading Hours – We tend to see the most significant volatility in the British pound during the London trading session, particularly at the market open, and when U.K. and U.S. economic data is released.
What Does the Economy Rely On? – The U.K. is a service sector economy that relies heavily on financial services, especially banking and insurance. London is the world’s largest financial center.
Who Does the Economy Rely on for Trade? – The Eurozone as a whole is the U.K.’s largest trading partner, but no an individual nation basis, the U.S. is the most significant followed by Germany and France.
Market Moving Economic Releases – Central bank rate decisions are usually the most market moving indicators, which means that they can create the greatest volatility for any currency followed by the employment report, the consumer spending and inflation reports.
The British Economy [13]
Key Facts
The British Economy is comprised of 76.2% Services, 22.8% Industrial, and 0.9% Agriculture. It's largest trading partners are US, Germany, France, Ireland and Netherlands. Some other key facts about the British Economy:
- London is the most active trading center for FX
- Former Reserve Currency, Now #3
- Home of the Oldest Central Bank
- Sixth Largest Economy
- Service Sector is Primarily Composed of Financials and Banking
General Economic Statistics
| 2008 GDP Estimate | USD $2.78 Trillion |
| Population | 61.1 Million |
| Interest Rate | 0.50% |
| Inflation^ | 2.30% |
| Trade Balance^^ | GBP -£2.5 Billion |
^As of May 2009 ^^As of March 2009
Market Moving Economic Releases
- BoE Rate Decision
- Retail Sales
- Consumer Prices
- Claimant Count
- GDP (Gross Domestic Product)
- Industrial Production
References
- ↑ Triennial Central Bank Survey (April 2007), Bank for International Settlements.
- ↑ "Economic terms explained", BBC News, November 12, 2007
- ↑ Bank of England Legislation
- ↑ History of Forex
- ↑ "Opec, Gold, Oil & the Dollar", BullionVault, January 10th, 2008
- ↑ "Pound devalued 30 per cent, Guardian Century, September 19, 1949
- ↑ 7.0 7.1 "BBC On this Day in 1972: Chancellor orders pound floatation, BBC Home
- ↑ 8.0 8.1 UK Base Interest Rate on housepricecrash.co.uk
- ↑ "The UK's record trade deficit", tutor2u, October 12, 2008
- ↑ "UK exports slip to create biggest goods trade deficit since 1697, The Guardian, October 10, 2008
- ↑ "Weaker pounds provides crumb of comfort for investors, Financial Times, October 31, 2008
- ↑ "Weak pound options for investors", Telegraph, October 22, 2008
- ↑ 13.0 13.1 13.2 FX360.com, British Pound (GBP) Factsheet by Kathy Lien
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