Not only is the Pound Sterling, the world’s oldest currency, a persistent – if wavering – second place currency in global foreign exchange (FX) markets. The Pound Sterling is the official currency of the UK and its territories. Further, it ranks as the fourth most traded currency worldwide. In 2022, it represented 12% of total FX trades and set an enormous daily average at $630 billion. The three major trading pairs – GBP/USD, GBP/JPY, and EUR/GBP – each fulfill a unique and important role in the FX market landscape. The Bank of England (BoE) preempts Parliament in making all the key decisions related to interest rates and overall economic stability. These decisions are absolutely essential to defending the Pound Sterling.
Historical Significance and Global Influence
And the Pound Sterling’s history is incredibly interesting, going back to 886 AD. It is lauded as the oldest currency in continuous use even to this day. Its durability and adaptability have established it as a pivotal pillar in worldwide capital markets. The Pound Sterling is the currency of Great Britain, UK. Its influence stretches well beyond the tiny country’s borders, helping shape the types of economic activity that occur around the world.
In the world of foreign exchange, the Pound Sterling is an impressive currency. It is the fourth most traded currency in the world, reflecting its importance as a vehicle for international financial transactions. In 2022 by itself, it made up 12% of all FX transactions with $630 billion average daily volume. This enormous trading volume further highlights its critical role in supporting global commerce and investment.
Major currency pairs linked with the Pound Sterling ₤ include GBP/USD, GBP/JPY, EUR/GBP. The GBP/USD pair nicknamed ‘Cable’ is especially interesting, making up 11% of FX trades. At the same time, GBP/JPY, referred to as the ‘Dragon’ makes up 3%, and EUR/GBP makes up 2% of FX trades. These pairs illustrate not only the interconnectedness of global economies, but the Pound Sterling’s ever important role in them.
The Role of the Bank of England
The Bank of England (BoE), central bank of the United Kingdom, plays a vital role in the issuance and management of the Pound Sterling. Founded in 1694, it lies at the centre of the UK’s financial system. This agency is vital for delivering our nation’s economic stability. One of the BoE’s central goals is “price stability,” which means keeping inflation at a low, steady rate, like 2%.
To achieve this objective, the BoE tracks the state of the economy and adjusts monetary policy in response. One important tool to do this is of course the Fed’s control over interest rates. When inflation is high, the BoE may raise interest rates to curb spending by making credit more expensive for both individuals and businesses. Conversely, if economic data suggests weakness, the BoE may consider lowering interest rates to stimulate economic activity by making borrowing cheaper.
The Trade Balance is the final important monetary variable for the Pound Sterling. A positive net Trade Balance increases demand for the currency, whereas a negative Trade Balance reduces it, putting downward pressure on the currency. Thus, domestic data releases that touch upon trade are key to gauging the Pound Sterling’s success in the world market.
Influences from Across the Atlantic
Though we know that domestic factors are most important in affecting the value of the Pound Sterling, international factors are hugely important. Specifically, US economic data moves the global FX markets, and the Pound Sterling is no exception.
The Core Personal Consumption Expenditure Price Index (PCE) inflation is the most important US data release. Therefore, the trade deal can have a tremendous impact on Pound Sterling. As a measure of inflation in consumer spending, changes in this index can affect market perceptions of future interest rate moves by the US Federal Reserve. As a result, changes in PCE inflation may cause changes in investor sentiment toward the Pound Sterling and other currencies.
Moreover, developments in major trading partners' economies can influence the Pound Sterling's trajectory. Even a small shift in economic sentiment or trade policy within the EU or Japan can move the needle in these important trading pairs. For example, volatility in these areas can have cascading impacts on EUR/GBP and GBP/JPY.