The Pound Sterling, the oldest currency in the world, remains a significant player in global financial markets. Dating back to 886 AD, it serves as the official currency of the United Kingdom. As the fourth most traded currency unit for foreign exchange (FX) worldwide, it accounts for 12% of all transactions. With daily transactions averaging $630 billion according to 2022 data, its influence on the international stage is undeniable. Key trading pairs such as GBP/USD, GBP/JPY, and EUR/GBP drive its prominence in the FX market.
The GBP/USD pair, often referred to as 'Cable', is a crucial component of FX transactions, representing 11% of global trades. Meanwhile, GBP/JPY, known as the 'Dragon', accounts for 3% of these transactions, and EUR/GBP makes up 2%. The Bank of England (BoE), responsible for issuing the Pound Sterling, plays a pivotal role in maintaining its stability. The BoE's primary goal of "price stability" hinges on achieving a steady inflation rate of around 2%.
A positive net Trade Balance enhances the strength of the Pound Sterling, whereas a negative balance can weaken it. Investors are currently on edge as they wait for Friday's PMI double-header from both the UK and the US, which is expected to influence the GBP's direction. The BoE may contemplate lowering interest rates if economic data appears weak, making credit cheaper and potentially boosting economic activity.
Higher interest rates often make the UK more attractive to global investors seeking lucrative opportunities to park their money, consequently strengthening the Pound Sterling. Conversely, if inflation runs too high, the BoE may opt to increase interest rates, a move that could lead to higher borrowing costs for individuals and businesses alike.