How strong is the GBP?

06 Sep How strong is the GBP?

The pound sterling (GBP) is one of the most traded currencies on the foreign exchange (forex) market. The United Kingdom uses the pound sterling as its official currency. It is the oldest currency still actively traded on the foreign exchange market and has a long history. London is one of the world’s largest centres for foreign exchange, which contributes to its popularity.

The GBP is frequently one of the first currencies new forex traders pick to trade because it is well-liked and well-known among traders. Traders may save a lot of time and effort by focusing on the economic reports and news stories that have the most significant impact on the GBP. As a result, the economic reports that will be discussed in this article should be helpful for traders who are just getting started and would like to learn more.

Major points to consider

Prior to getting started, it’s critical to understand that currencies from various countries tend to be impacted by the same economic causes. The most significant influences on all currencies tend to be monetary policy, price inflation, confidence and mood, economic growth (GDP), and the balance of payments.

Price and inflation are the primary factors that influence the value of the GBP. In general, when inflation is high, a nation’s currency depreciates more than the currencies of other nations. Additionally, when inflation occurs, the central bank is typically forced to take action to prevent these undesirable outcomes, such as changing interest rates.

To determine how much inflation there is in the UK, most traders use the Consumer Price Index (CPI), which is compiled and published by the Office for National Statistics. The CPI calculates the changes in prices of the goods and services that consumers have purchased over a specific time period. The Bank of England (BOE) utilises this report to determine its inflation target, making it crucial. The BOE may alter its monetary policy in the future, which might have a significant impact on the GBP if the CPI changes in a way that contradicts the BOE’s inflation aim.  

Additionally, although the Producer’s Price Index (PPI) and other metrics are also helpful, changes in consumer prices often account for the majority of changes in inflation. Because the PPI reveals changes in inflation at the level of raw materials, which may later be reflected in the CPI at the level of consumers, many people believe that the PPI is a leading predictor of inflation. The PPI report is released before the CPI data; thus, both reports should be compared to gain a complete view.

Financial policy

Another crucial factor to consider is the monetary policy of the Bank of England (BOE). The primary responsibility of the BOE is to advance monetary stability, which is defined by the bank as “low inflation and confidence in the currency. The BOE will use the monetary policy tools at its disposal to reduce inflation when it believes that it is rising to a point where it threatens the stability of the pound. When these things might occur, such as when interest rates fluctuate, is what traders want to predict.

To maintain track of monetary policy, traders will monitor changes in the bank rate, which is the interest rate banks charge other banks for balances held with the BOE. The Monetary Policy Committee (MPC) decides on interest rates during each monthly meeting. The Bank of England website lists these decisions. It is significant to notice that there is typically no controversy if the MPC simply maintains the bank rate. However, the MPC will make a statement that is more intriguing and can provide clues as to what might happen next if the rate changes.

Aims and objectives for the upcoming year can be used to ascertain how individuals feel about the direction of the British economy.

The payments balance

The Report’s Primary Focus Areas Will Be the Trade Balance and Current Account

The balance of payments (BoP) of a nation serves as a record of its trade relations with other countries. The BoP is made up of three accounts, but the current account is the only one that most forex traders are concerned with. The current account reveals how much a nation exports and imports and how much money enters and leaves the nation. A current account surplus generally benefits the currency since it indicates that more money is flowing in than is leaving. Contrarily, a deficit is undesirable because the inverse is true.

Additionally, whereas the current account report is released every three months, the trade balance report is released every month. Use the trade balance report if you only want to learn about imports and exports.

In summary

The value of the pound is susceptible to a wide range of economic factors. Choosing the data reports to use is the first step. Understanding and combining reports to determine a trade direction is the challenging part. But these five important regions are an excellent place to start if you’re just getting started and want to trade based on fundamental news for the pound.