Major Currency Profile: What to Know About The British Pound

Updated: Apr 6


The British Pound


The pound sterling is one of the most traded currencies in the world today. The pound is the second most actively traded currency after the US dollar, as shown on the world chart's most traded currency. The pound, not to be confused with the franc or the lira, is one of the oldest currencies in the world and is the largest reserve currency in the world, at 39.1% of the world's central bank reserves, with the US dollar at 39.5%.


Managed money flowing into a currency can lead to bullish price movement, creating the possibility of higher profits for those that can at least partially anticipate those flows. Due to its flexibility, the British pound has long been one of the most popular currencies with professional traders and retail traders alike, making it a good choice for those beginning in the FX markets. A focus on economic reports that affect GBP specifically can help traders better prepare for predictable moves in price resulting from those specific reports.


In this article, let's explore everything you should know about the British pound.


Here's what you need to know:


The History of the British Pound


Until a few years ago, the Pound was the number one reserve currency globally.


The British pound began its life as a unit of account in the 14th century and was used by King Henry III as a unit of account in 1266. The British pound was first adopted as a monetary unit in 1544. The pound was first used as the official currency of the Great Britain in 1558. The pound sterling is the fourth-most-traded currency in the world, with a daily trading volume of more than $1.8 billion.


The monetary system run by the Bank of England is based on the gold standard, which means that the currency was directly linked to the price of gold rather than the price of a foreign currency, as is the case with most modern currencies.


The gold standard was abandoned in 1943, at the height of World War II. However, the pound sterling was re-coupled to gold in 1968. In 1972, the UK devalued the pound, aligning it with the US dollar and other world fiat currencies. In 1979, the pound sterling became a free-floating currency. That is, its value was allowed to fluctuate with market supply and demand rather than being fixed against the price of gold. The pound is now pegged against the euro rather than the US dollar.


Today, the UK's pound is a soft currency. That is, it is a fiat currency whose value is determined by market demand. The value of the pound fluctuates daily, like all other fiat currencies.


The Value of a British Pound Today


Today, the value of the British pound is volatile and fluctuates against the other currencies of the developed world. Today, the pound sterling is the second most traded currency in the world after the US dollar and is also the third-most-traded currency in terms of global reserves.


In terms of exchange value, the British pound is essentially nominal. One pound sterling is equal to 100 pence, equivalent to 20 shillings, equal to 240 old pence. The pound is still a gold-backed currency, at least nominally, with a tiny currency in circulation backed by gold.


Countries That Use the Pound Sterling


Only the UK uses the pound sterling as its national currency. The pound sterling is also used by the British overseas territories, of which there are fourteen.


The British Overseas Territories use the same currency, the British pound sterling. The main British Overseas Territories which use the British pound sterling are Anguilla, Bermuda, the British Virgin Islands, the Cayman Islands, Montserrat, the Turks and Caicos Islands, the British Indian Ocean Territory, Gibraltar, the Falkland Islands, the Pitcairn Islands, and the Sovereign Base Areas of Akrotiri and Dhekelia.


How the British Pound Works


The British pound is an integral part of the Forex market and is traded on multiple exchange platforms worldwide. The UK's pound sterling is one of the most actively traded currencies in the world. It is freely convertible on most of the major exchange platforms worldwide and is not regulated by a central bank.


How the British Pound is Influenced


The underlying factor that influences the value of a British pound is that it is a global reserve currency, one of three with the US dollar and the euro. The British pound is affected by the actions of its host country, the UK. If the UK economy is showing signs of weakness or strength, this will be reflected in the pound's value.


The factors that affect the strength of the UK economy are largely the same as those that affect the European economy, which the UK is a part of, and those that affect the US economy.


Major Indicators That Affect the British Pound


In order to get a handle on how the British pound might perform in the future, a trader needs to understand the factors that affect the health of the UK economy and the factors that affect the value of the pound.


Central Bank Rate Movements


The Bank of England, the UK's central bank, has clear objectives in mind when it comes to interest rate movements. The central bank has an inflation target of 2% (inflation is the increase in the price level over time, as measured by a price index, like the Consumer Price Index). The Bank of England also has a target for unemployment, at 4% as of January 2015.


The central bank has said that it will increase its base rate by at least 1% if inflation is more than one percentage point above its target. If the unemployment rate is more than 1% above its target, the central bank will also move to increase its base rate.


Inflation Rate


At the beginning of 2015, the UK inflation rate was at 1.5%, well below the Bank of England's target of 2%. The government is trying to keep the inflation rate below the Bank's target to support the current weak UK economy.


Unemployment Rate


The British unemployment rate at the beginning of 2015 was at 5.7%, well above the Bank of England's target of 4%. The British economy is still struggling to recover from the 2008 financial crisis, and the Bank of England has said that it wants to keep interest rates below the rate of inflation to support the fragile economy.


Trade Balance


At the beginning of 2015, the UK's trade deficit was at £3.7 billion, which is the largest deficit in 2 years. As of January 2015, the UK's trade deficit has been on a downward trend. The trade balance is a major factor in the health of the economy.


The Best Times to Trade the British Pound


The British pound is traded around the clock but has a typical daily trading range between 4 GMT and 10 GMT. The British pound can be traded both intra-day and end-of-day. Due to the UK's position as an economic powerhouse in the world, the British pound can be traded for more extended periods during the trading day. The exchange rate between the British pound and other currencies can also be traded in the middle of the night.


The British pound is one of the most liquid currencies traded on the globe but becomes less liquid during the trading hours of the day in the United States.


The best time to trade the British pound is during the London trading hours, from 16:00 to 21:00 GMT. This is the most liquid period for trading the pound sterling.


How to Trade the British Pound


The British pound is one of the most heavily traded and liquid currencies on the global Forex market. The British pound is one of the most traded currencies on most of the major Forex trading platforms and is traded on a 24-hour basis on most of the major Forex platforms.


Foreign exchange traders can trade the British pound with a wide variety of technical and fundamental analysis tools and a number of different trading strategies.


There are a number of different trading strategies that can be used when trading the pound. These strategies vary considerably in terms of their time for their trades to develop.


Strategies for Trading the British Pound


The many different trading strategies that can be used when trading the pound can be divided into four different categories, depending on how long the trader expects the trade to move in the direction that the trader is anticipating.


Short-Term Strategies


Short-term trading strategies typically involve holding the position for less than one day. The following strategies work best when the trader expects the position to move in the trader's anticipated direction within a day.


Mid-Term Strategies


Mid-term trading strategies typically involve holding the position for longer than one day, up to one week. The following strategies work best when the trader expects the position to move in the trader's anticipated direction over the course of a week.


Long-Term Strategies


Long-term trading strategies typically involve holding the position for longer than one week. The following strategies work best when the trader expects the position to move in the trader's anticipated direction over the course of multiple weeks.


Price Action Strategies


Price action is any technical analysis strategy that is based on the price action of the underlying currency pair. Price action strategies involve placing trades based on the real-time charts of the market. Price action traders use a combination of indicators, oscillators, and chart patterns.


Trend Following Strategies


Trend following strategies involves placing trades during market trends. Short-term traders, mid-term traders, and long-term traders can use these strategies. A trend trader buys when the price trend is up and sells when the price trend is down. These strategies are the most vulnerable to trades that go against the direction of the underlying trend and experience the greatest amount of drawdowns.


Range-Based Strategies


Range-based strategies involve placing trades when the price of the underlying currency pair is near the top of its trading range or the bottom of its trading range. These strategies are best when the trader expects the price of the underlying currency pair to move within a particular trading range and experience the least amount of drawdowns, especially when the trader is holding the position for a long period of time.


Intra-Day Strategies


Intra-day trading strategies do not involve holding the position for more than one day. These strategies include placing trades in a shorter time, such as the intra-day time frame. These strategies also involve placing trades in the middle of the trading day.


The Importance of the British Pound


The British pound is one of the most important currencies traded globally, alongside the US dollar and the euro. This is because the pound is a major currency that is used in a variety of international trade transactions. It is also a major used in investment portfolios as one of the top currencies.


The pound is one of the most used currencies in the world and the third most widely held currency. There is approximately USD one trillion worth of British pound assets in existence.


The British pound is the second most used currency in world trade in terms of its global use. It is a major reserve currency, with around 31% of all global holdings of cash and cash equivalents, such as bonds, being in the British pound.


Conclusion


Any Forex trader interested in trading the British pound should do their homework to get a handle on the fundamentals of the pound.


Understanding the factors that affect the pound, the pound's relationship with the other major currencies of the world, and the potential profit potential that comes with trading the pound are the first steps to trading the pound.


Once the investor has a handle on the fundamentals of the British pound, the investor will be able to make more informed trading decisions and be more likely to make more money in the Forex market.


Bound is an auto hedging platform dedicated to making currency protection better for businesses. It's a great software program to help you look at the risk you have in any one currency. Watch a demo today to learn more, and contact us for more information!



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