The British Pound (GBP)

The United Kingdom is the world's fourth largest economy. Its gross domestic product (GDP) is 1.2 trillion Pounds (or $2.04 trillion). The UK economy is distinguished by many consecutive years of strong growth and low unemployment.

The UK is a service-oriented economy. Services account for 75 percent of gross domestic product. Manufacturing is the second largest sector. The UK is also one of the largest producers of natural gas. In fact, energy accounts for 10 percent of the of GDP, which is one of the highest shares of any industrialized country.

As a net importer of goods, the UK carries a large trade deficit.

Exports

Export markets are very important to the value of the British Pound. The stability of its export markets directly affects the value of and demand for the Pound. A strong Pound will reduce the number of exports. A weak Pound will boost exports.

The UK has five major export markets:

• European Union
• United States
• Germany
• France
• Ireland

Imports

A strong GBP will boost imports because it makes foreign goods cheaper to GBP holders. A weak GBP will reduce imports, but will boost exports.

The UK has five major import sources:

• European Union
• Germany
• France
• United States
• The Netherlands

The central bank in the UK is the Bank of England (BoE). It is one of the most effective central banks in the world. The Monetary Policy Committee (MPC) consists of nine members and sets monetary policy for the United Kingdom.

The Bank of England's goal is centered around achieving an inflation target set by the Treasury Chancellor. However, the BoE is quite independent. It has the power to change interest rates to meet its inflation targets or objectives.

The Bank of England will usually meet on the same day or week as the European Central Bank (ECB).

The following characteristics are important for traders to know about the GBP as they affect the demand for the currency:

• GBP/USD is one of the most liquid currencies in the world. Six percent of all currency trading uses the GBP.
• The GBP serves as an alternative investment for non-Americans.
• GBP has one of the highest interest rates among developed countries so it is used as a lending currency for carry trades.
• There is a strong positive correlation between energy prices and the GBP.
• The EUR/GBP is a measure for strength of the UK economy.
• The GBP is also called the "Cable" and "Sterling."

Important economic indicators in the UK that directly affect the value of the GBP are (in order of importance):

• Employment Situation
• Retail Price Index
• Gross Domestic Product
• Industrial Production
• Housing Starts

Unlike the Euro, the Pound is not as sensitive to US economic data. However, it will react to announcements by the Fed (US).

Announcments by the ECB are generally supportive of the Pound and coincide with Bank of England decisions.

Many investors consider the Pound to be a safe haven currency when the USD is weak. There is a strong correlation between the price of oil and the strength of the Pound.