Trading the British Pound in 2020
The British Pound, represented by the Forex code GBP, is one of the world’s oldest currencies still in circulation today. Sometimes known as the Sterling Pound, it is the official currency of the United Kingdom, which comprises the countries of England, Wales, Northern Ireland and Scotland. Its official symbol is £, and each pound is made up of 100 pennies, or pence. The Pound is one of the world’s major currencies, ranked alongside the US Dollar, Euro and Japanese Yen. It has the highest worth of all major world currency units, and is a popular currency among Forex traders for numerous reasons. The capital, London, it one of the world’s largest and busiest trading centres, a fact that contributes to the high amount of trade in this currency. It is currently the third most traded currency in the world, sharing the position with the Japanese Yen. The GBP is also a floating currency, which allows investors to sell and buy the currency in an offshore market with no difficulty. There are also frequently extreme and sharp fluctuations in the value of the Pound, and this makes it a preferred choice for investors. The responsibility for the issuance of the currency and for setting interest rates rests with the Bank of England, also referred to as the BoE.
The History of the Pound Sterling
The Pound is the oldest surviving currency, with a history that dates back to Anglo-Saxon England. The silver penny was first introduced in the reign of King Offa of Mercia (from 757 to 796) and spread rapidly through the Anglo-Saxon kingdoms to become standard coinage. Although these early coins were created from fine silver, in 1158 a new type of coinage was introduced that only used 92.5% silver. This became known as Sterling silver, which gave the currency its name.
In 1694, the Bank of England was established, and began to issue bank notes. The Pound Sterling was also used throughout the majority of the British Empire, although in some areas it was used alongside the local currency, such as in Canada. Many other areas such as Australia, Cyprus, South Africa and New Zealand created their own currencies, but many retained parity with the Pound Sterling. During the 19th century, it was very common for the Pound to be accepted as legal tender outside Great Britain, and until the outbreak of World War I, the UK had one of the strongest economies in the world, being in possession of 40% of global overseas investments. This changed at the end of the war as the country was deeply in debt, and the country was then plunged into the Great Depression during the 1930s, which caused more devaluation. The Pound was pegged to the value of the US Dollar in 1940 until it was devalued in 1949. There were ongoing discussions about decimalising the currency, and in 1966, a decision was made to convert the Pound to a decimal currency, replacing the Pounds, shillings and pence with Pounds and new pennies (pence) in 1971. From this period onwards, the Pound became a free-floating currency, and in 1997, the Bank of England was given responsibility for handling day-to-day interest rate control. Although the UK could have chosen to adopt the Euro as its currency as a member of the European Union, it elected to opt out of the single currency; and now that the UK has decided to withdraw from the EU this is unlikely to ever take place in the future.
The Economy of the United Kingdom
The United Kingdom has the fifth largest economy in the world in terms of GDP, but only the ninth largest in terms of PPP, which comprises only 4% of global GDP. The United Kingdom is the world’s ninth biggest exporter of goods and the sixth biggest importer. It is also one of the most globalised economies in the world, being composed of the economies of its component countries: England, Scotland, Wales and Northern Ireland. The UK economy is dominated by its service sector, which contributes around 78% of the nation’s GDP. Its financial service industry plays a particularly important role, with London being the most important financial centre in the world. The UK’s aerospace industry is also vital to the economy, as is the pharmaceutical industry. The UK’s automotive industry also has considerable importance. Oil and gas production from the North Sea boosts the UK economy; however, the country experiences significant variations in prosperity between the different regions, with the South East being the most affluent. London’s economy is so large that it is the largest city in terms of GDP within Europe.
Significant Factors That Affect the GBP’s Exchange Rate
There are numerous factors that affect the exchange rate of the British Pound. These include the following:
- Inflation and price – The CPI and PPI reports are both good indicators of inflation levels.
- Monetary policies – The BoE inflation report is a key factor.
- Sentiment and confidence – The Nationwide Consumer Confidence Survey and GfK Consumer Confidence Survey are key tools for determining the sentiment of the people towards the economy.
- GDP – The GDP, together with the Retail Sales, Services PMI and Manufacturing PMI reports, measures the economic health of the nation.
- Balance of payments – This shows levels of imports and exports, and determines where surpluses lie.
- Political news – Any indication of political change or unrest may impact on the value of the Pound.