A Pound Sterling Primer for Forex Traders
(eToro Blog) With an interest rate and monetary policy decision due tomorrow from the Bank of England (expectations in both cases are for the status quo), currency traders who specialize in the Pound Sterling aka GBP (for Great British Pound) are likely to be paying close attention for any surprises from the U.K.’s central bank. This then is a good opportunity to offer a brief primer for new traders on the U.K. and the Pound Sterling.
The U.K. economy is the world’s sixth largest; the consistent growth that it has enjoyed has been derailed recently by the Eurozone’s debt crisis. Europe is a key trading partner to the U.K., in terms of both imports and exports, consequently the Eurozone’s problems have plagued the U.K. economy. Thusly the economic indicators which impact the U.K. economy, as can be expected, are not just U.K.-based but Eurozone-based. While Britain is a European Union member, it is not a member of the European Monetary Union, and thus has its own “interests” to look after, which are often at odds with the EMU’s. The U.K. government has a strong pro-business policy which it supports fiercely.
The London financial sector is the most important one in Europe and considered the second most important in the world, after the U.S.’ Wall Street. It has become a more than viable option for global investment, and is seen as a sound alternative to Wall Street for raising capital.
At one time, it was considered the world’s dominant currency, but lost that title to the U.S. Dollar several decades ago. The Bank of England is mandated to ensure the stability of the Pound, and they do that through monetary policy and an explicit inflation target of 2%. Among all of the world’s currencies, the Pound is considered one of the most financially and economically important; it is the fourth highest traded in terms of turnover, while the third relative to reserve currencies held (behind the U.S. Dollar and Euro).
Why not the Japanese Yen or the Swiss Franc, both so-called safe haven currencies, as the third largest reserve currency rather than the British Pound? In part it is due to having London as the European financial capital and as a key global trading center, but analysts also say that it is a result of the government’s long-standing role as a global leader. Though elections determine the extent of policy changes, on the whole the government is considered exceptionally prudent and conservative and they run the economy in the same way.
That’s abundantly apparent; though the U.K. economy has been struggling in recent months and still has a large budget deficit to overcome, with little exception the government has shown through its actions that they are committed to their goal. As one of the few currencies which is valued higher than the U.S. Dollar (GBP/USD is currently trading at 1.6106), the government and central bank has stood fast to ensure that its value isn’t diminished.
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