There are many dialects in the UK because it is composed of four countries-England, Northern Ireland, Scotland and Wales.
With the Queen as the head of state, Britain is a constitutional monarchy, but it is actually managed by the parliamentary system located in the British capital London.
The United Kingdom is also a member of the European Union. However, the United Kingdom did not join the euro area, but insisted on using the British pound as its national currency. Unfortunately, this means that you cannot travel to the UK with a Schengen visa. If you want to go, you need another visa.
Neighboring countries: Ireland, Germany, France
Area: 94,060 square miles
Population density: 661.9 people per square mile
Capital: London (population 8,308,000)
Head of State: Queen Elizabeth II
Prime Minister: David Cameron
Currency: British Pound (GBP) or Shilling
Main imports: finished products, machinery, fuel, food
Main exports: finished products, fuel, chemicals, tobacco, David Beckham, Simon Cowell
Import partners: Germany 12.6%, China 8%, Netherlands 7.5%, France 5.4%, United States 6.5%, Norway 4%, Belgium 4.4%
Export partners: US 10.5%, Germany 11.3%, France 7.4%, Ireland 6.2%, Belgium 5.1%
Time zone: GMT
Britain is the seventh largest economy in the world and the third largest economy in Europe, after Germany and France. History tells us that it is a force that needs to be taken into consideration. After all, Britain opened the door to the industrial revolution.
Britain was once the largest empire in the world. For the past 300 years, Britain has been an important world power. This is called stability.
In terms of trade, the UK is a net importer with a persistent trade deficit. Its largest trading partner is the Eurozone, more precisely Germany.
Trade activity with the Eurozone accounts for more than half of the total British trade. From an individual perspective, the United States is the UK’s largest trading partner.
The UK is also home to the world’s oldest important financial center. We are referring to London! Having a financial center like London magnifies the role of Britain in global trade.
Monetary and fiscal policy
There is a little thing to remember: the oldest bank in the world is the Bank of England (BOE). At that time, Britain was experiencing economic expansion, and government leaders realized they needed an entity to help them promote international trade. The Bank of England was born. In 1694, the Bank of England was founded to promote trade and growth.
The main purpose of the Bank of England’s monetary policy is to maintain price stability while increasing employment rates.
The Bank of England’s target inflation rate is 2.0%, measured by the Consumer Price Index (CPI). To achieve its goal, the Bank of England can change interest rate levels.
The Bank of England’s department in charge of interest rates is the Monetary Policy Committee (MPC).
MPC meets every month and announces changes in monetary policy after the meeting, including changes in interest rates. Like everything else in the UK, interest rates have a name in the UK-banks repurchase interest rates.
The main monetary policy tools used by the Bank of England MPC are bank repurchase interest rates and open market operations. The bank repurchase rate is set by the Bank of England based on its own market operations to help achieve inflation goals. Whenever MPC changes this interest rate, the interest rate of commercial banks will be affected. This will affect economic expenditures and output, which in turn will affect costs and prices.
Like other central banks, if the Bank of England raises the repurchase rate, its purpose is to curb inflation. Conversely, if it lowers interest rates, it indicates that it wants to stimulate economic growth.
When the Bank of England adopted open market operations, the Bank of England changed the money supply in the market by buying and selling bonds or securities priced in pounds sterling. This is one of the alternative ways to increase liquidity in financial markets.
If the Bank of England thinks it is necessary to stimulate economic growth, it will “print more money” and then buy the government or corporate bonds to make the money flow into the market.
Conversely, if the Bank of England feels that the economy is doing well, it will sell more securities and “recover” the money in the market.
Learn about pounds
Pound sterling must be a very popular child because it has many aliases. In addition to being called shillings and pounds, pounds are also called cables (GBP/USD) and guppies (GBP/JPY). Impressed, eh?
GBP/USD is the most active currency pair in the foreign exchange market. why? Remember, London has long been one of the world’s major financial centers, with a lot of transactions every day and banknotes coming in and going out frequently.
In addition, GBP/USD accounts for 14% of world daily trading volume, making it the third most attractive currency pair. This may be why the spread of GBP/USD is one or two points higher than that of EUR/USD and USD/JPY.
Many large companies are headquartered in London, and there are many attractive investments in the British market.
At the same time, as interest rates are usually higher in major currencies, investors find British securities very attractive. In order to buy these assets, they need to buy pounds.
The trading volume of GBP/USD is the highest in Europe. In New York, when the data of the UK and the US are released, the GBP also has potential huge fluctuations.
During the Asian session, it hasn’t changed much, because most European traders are still resting, and US traders have just concluded a day of trading.
The British Pound currency pair tends to be more volatile because it is less liquid than the Euro. As the market’s liquidity becomes lower, the pound is stuck, especially when there is a lot of buying and selling. Compared with other currency pairs, the British pound currency pair responded more strongly to unexpected data.
Important economic data related to the pound
Consumer Price Index (CPI): The Bank of England uses this to measure inflation. It reflects changes in the price of everyday consumer goods.
Unemployment rate: This data reflects the number of unemployed people in the UK economy. Analysts usually study this data very carefully because it is a leading indicator of future spending. why? If a person does not have a job, he has no money. Without money, nobody would have afternoon tea!
Gross Domestic Product (GDP): This data reflects the state of the British economy. It will show whether the British economy is prosperous and growing, or is trapped in the English Channel and drowning.
Purchasing Manager Index (PMI): This index surveys purchasing managers and asks them about their current economic situation. A reading above 50.0 indicates that the situation has improved and the economy has expanded. A reading below 50.0 indicates that the economy may be in a state of contraction.
GFT Consumer Confidence Report: This report measures consumer confidence in current and future economic conditions. The higher the consumer’s confidence in the state of the British economy, the more willing they are to spend.
What factors affect the trend of the pound?
Monetary policy changes
Many investors focus on the pound to find high-return assets and arbitrage transactions. Changes in MPC interest rates will change the market’s sentiment towards the British pound, because the changes will affect the UK securities yield.
In addition, changes in bank repurchase rates reflect the Bank of England’s view of the economic outlook.
If officials of the Bank of England feel that the economy is frustrated, they will either expand quantitative easing measures or lower interest rates, which will send a signal to the public that the British economy is unstable.
If the Bank of England feels that the economy is on the rise, it will lead to inflationary pressure, then they will reduce quantitative easing or increase interest rates.
Eurozone and US development
Like other currency pairs, GBP/USD is affected by the development of the Eurozone and the United States. US economic data directly affects the sentiment of investors and traders in the market. The quality of the US data may increase the risk appetite of market participants and run toward the pound, or it may make them tend to avoid risks and turn to the safe haven dollar.
The Eurozone is a very important member of the British trading partners. Therefore, you should always pay attention to the development of the European continent (remember, the UK is an island country!). Any bad news or poor economic performance may cause the British pound to be bearish.
Affected by risk appetite
Despite the small amount, the pound benefited from higher interest rates than other major currencies. When traders seek high returns, they will look to the UK because their investment has a high potential for high returns. When traders give up high-return investments, they will turn to their dear US dollars and sell British pounds.
The number of GBP/USD transactions is measured in GBP. A standard lot is £100,000 and a mini lot is £10,000.
The value of each point is measured in US dollars and is calculated based on the current price of GBP/USD.
Gains and losses are denominated in US dollars. For a standard lot, the value of each change is $10. For a mini lot, the change for each lot is $1.
The calculation of margin trading is based on US dollars. For example, if the current GBP/USD exchange rate is 1.5000 and the leverage ratio is 100:1, the minimum margin required to trade a standard lot should be 1500 USD. However, as the GBP/USD exchange rate rises, the demand for USD margin will increase. Conversely, the amount of USD margin required will be reduced.
GBP/USD trading tips
The first method of trading GBP currency pairs is to focus on when the report is published. The British pound responded strongly to the economic report.
For example, if the UK GDP is higher than expected, it may cause the pound to rise sharply. Even if you get late, you can still get a profit because the pound has risen a lot.
But be careful-GBP/USD and GBP/JPY are the most volatile among all major currency pairs. In fact, GBP/USD changes by 160 points per day on average. Because the pound is too volatile, you may want to set a wider stop loss order to resist large market changes.