Currency Profile: British Pound (GBP)
Pound sterling, commonly simply known as the pound, is the official currency of the United Kingdom (UK, the United Kingdom of Great Britain and Northern Ireland), British Crown dependencies (the Isle of Man, The Channel Islands of Jersey and Guernsey) and Certain British Overseas Territories: South Georgia and the South Sandwich Islands; the British Antarctic Territory, Tristan da Cunha, and British Indian Ocean Territory. The United Kingdom (also commonly known as Britain) is EU (European Union) member but does not use the euro as their official currency. The United Kingdom entered the European Exchange Rate Mechanism
Important Characteristics of the British Pound
- GBPUSD is very liquid. The GBPUSD is one of the most liquid currencies in the world, with 6% of all currency trading involving the British pound as either the base or counter currency. It is also one of the three most liquid currencies CURRENCY PROFILE: BRITISH POUND (GBP) 227 alongside EURUSD and USDJPY. One of the reasons for the currency’s liquidity is the country’s highly developed capital markets. Many foreign investors seeking opportunities other than the United States have sent their funds to the United Kingdom for investment. In order to create these transactions, foreigners will need to sell their local currency and buy British pounds.
- GBP has three names. The UK’s currency has three names: the British pound, sterling, and cable. All of these are used interchangeably.
- Interest rate differentials between Gilts and foreign bonds are closely followed. Interest rate differentials between UK Gilts—U.S. Treasuries and UK Gilts and German Bunds are widely watched by FX market participants. Gilts versus Treasuries can be a barometer of GBPUSD flows, while Gilts versus Bunds can be used as a barometer for EURGBP flows. More specifically, these interest rate differentials indicate how much premium yield UK fixed-income assets are offering over U.S. and European (German Bunds are usually used as a barometer for European yield) fixed-income assets, or vice versa.
- Euro sterling futures can give indications for interest rate movements. Since the UK interest rate or bank repo rate is the primary tool used in monetary policy, it is important to keep abreast of potential changes to the interest rate. Comments from government officials is one way to gauge biases for potential rate changes, but the Bank of England is one of the only central banks that requires members of the Monetary Policy Committee to publish their specific voting records
- Comments on euro by UK politicians will impact the euro. Any speeches, remarks (especially from the Prime Minister or Treasury Chancellor), or polls in regards to the euro will impact currency trade. Indication of adoption of the euro tends to put downward pressure on GBP, while further opposition to euro entry will typically boost the GBP. Reason being that in order for the GBP to come in line with the euro, interest rates would have to decline and monetary policy would have to be subjected to a foreign entity.
- GBP has positive correlation with energy prices. The UK houses some of the largest energy companies in the world, including British Petroleum. Energy production represents 10% of GDP. As a result, the British pound tends to have a positive correlation with energy prices. Specifically, since many members of the EU import oil from the United Kingdom, as oil prices increase, they will, in turn, have to buy more pounds to fund their energy purchases. In addition, rises in the price of oil will also benefit the earnings of the nations’ energy exporters.
- GBP crosses. Although the GBP/USD is a more liquid currency than EURGBP, EURGBP is typically the leading gauge for GBP strength. The GBPUSD currency pair tends to be more sensitive to U.S. developments, while EURGBP is a more pure fundamental pound trade since Europe is Britain’s primary trade and investment partner.
Pound sterling in 3 British Crown dependencies
Pound sterling (GBP) is the legal currency of the three British Crown dependencies, Isle of Man, Guernsey and Jersey. They also produce their own local issues of sterling: Manx pound (Isle of Man pound), Guernsey pound and Jersey pound.
Manx pound, Guernsey pound and Jersey pound are not separate currencies but issues of coins and banknotes denominated in Pound sterling (GBP). They do not have ISO 4217 codes, however for commercial use, codes of IMP (Manx pound), GGP (Guernsey pound), and JEP (Jersey pound) are generally used. Both Guernsey pound and Jersey pound circulate freely in the UK and may be accepted in some places. Manx pound is not generally accepted in the UK.
Pound sterling coins and banknotes
The sterling pound is regarded one of hard currencies and the third most held reserve currency in global reserves. After The United States dollar, the euro and the Japanese yen, the sterling pound is the fourth most traded currency in the foreign exchange market.
Pound sterling is subdivided into 100 pence (singular: penny). Britain converted to decimal currency on February 15th, 1971. Currently, the oldest circulating coins in the U.K. are the 1p and 2p copper coins introduced in 1971. Frequently used Pound sterling coins are in denominations of 1p, 2p, 5p, 10p, 20p, 50p, £1, £2. Frequently used Pound sterling banknotes are in denominations of £5, £10, £20, £50.
- Australia has made special edition coins and notes to celebrate events such as the wedding of Charles, Prince of Wales, and Lady Diana Spencer in 1981 and the Brisbane Commonwealth Games of 1982.
Important Economic Indicators for the United Kingdom
All of the following indicators are important for the United Kingdom. However, since the United Kingdom is primarily a service-oriented economy, it is particularly important to pay attention to service sector data.
Every month, Markit Economics releases the PMI indices for the manufacturing, service, and construction sectors. These numbers are extremely market moving because they provide the most up-to-date information on how each of the economies is performing in the current month and not how the economies performed the previous month, like many other reports. However since the reports are for the current period, they are usually subject to revisions, so the euro will move on the preliminary and secondary reports. A reading above 50 represents expansion, and a reading below 50 represents contraction. For the United Kingdom, the PMI services index is the most important, along with the composite index, which aggregates how the manufacturing and service sector are performing.
The employment report is a monthly survey of the labor market conducted by the Office of National Statistics. The objectives of the survey are to divide the working-age population into three separate classifications (employed, unemployed, and not in the labor force), and to provide descriptive and explanatory data on each of these categories. Data from the survey provide market participants with information on major labor market trends such as shifts in employment across industrial sectors, hours worked, labor force participation, and unemployment rates. The timeliness of the survey makes it a closely watched statistic by the currency market as it is a good barometer of the strength of the UK economy and an important input into monetary policy.
The key to growth is consumer spending, and for this reason, the retail sales report is also extremely market moving. The Retail Sales Index measures the total goods sold by a sampling of retail stores over the course of a month. This index is used as a gauge of consumer consumption and consumer confidence. While retail sales can be quite volatile due to seasonality, it is one of the most important indicators on the health of the economy, along with a key input for GDP.
Consumer or Retail Price Index
CPI or RPI is a measure of the change in prices of a basket of consumer goods. The markets however focus on the underlying RPI or RPI-X, which excludes mortgage interest payments. The RPI-X is closely watched as the treasury sets inflation targets for the BoE, currently defined as 2.5% annual growth in RPI-X.
GDP is a quarterly report conducted by the Bureau of Statistics. GDP is a measure of the total production and consumption of goods and services in the UK. GDP is measured by adding expenditures by households, businesses, government, and net foreign purchases. The GDP price deflator is used to convert output measured at current prices into constant-dollar GDP. The data are used to gauge where in the business cycle the United Kingdom finds itself. Fast growth often is perceived as inflationary, while low (or negative) growth indicates a recessionary or weak growth.
The industrial production (IP) index measures the change in output in the United Kingdom of manufacturing; mining and quarrying; and electricity, gas, and water supply. Output refers to the physical quantity of items produced, unlike sales value, which combines quantity and price. The index covers the production of goods and power for domestic sales in the United Kingdom and for export. Because IP is responsible for close to a quarter of gross domestic product, IP is widely watched as it can provide good insight into the current state of the economy.
UK Housing Starts
Housing starts measures the number of residential building construction projects that have begun during any particular month. This is important for the United Kingdom as the housing market is the primary industry that sustains the economy.