The United Kingdom was, up until the 20th century, the place to be. London banks were massive—they still are—and the UK’s financial district, particularly in London, was unmatched. The UK was also responsible for kicking off the biggest revolution of them all—the industrial revolution.
Despite being part of the European Union, the UK has yet to adopt the Euro, and few expect it ever will. Forex traders, then, have another first-rate currency to trade, the British Pound.
Monetary policy is decided by the Bank of England, one of the world’s oldest central banks still in existence today.
The UK Economy
The United Kingdom produces $2.1 trillion of goods and services each year, making it much smaller than the United States and the greater European Union. However, due to the size of the United Kingdom—in terms of population, and total land area—the UK is one of the most productive economies in the world.
The country imports primarily manufactured goods, transportation equipment and materials, fuel, and capital goods such as industrial grade machinery.
Importing partners include:
• Germany
• The United States
• China
• Netherlands
• France
• Belgium
Exports include metals and ores, agricultural products and food sources, refined fuels, and heavy machinery.
Exporting partners are:
• The United States
• Germany
• France
• Ireland
• Netherlands
• Belgium
Finance remains the United Kingdom’s largest export, even though the country maintains a large trade deficit, which it has experienced for decades. The relationship between the UK and US economy is mostly in terms of financial services, with New York and London being heavily intertwined in making financial businesses, including the processing of foreign exchange transactions!
UK Monetary Policy
The Bank of England governs monetary policy for the United Kingdom, a job which has been a responsibility of theirs since 1694.
The Bank of England, much like the European Central Bank, has a charter to minimize inflation to a healthy rate of 2 percent per year, while fostering economic growth. The Bank of England calculates its own Consumer Price Index to track the change in consumer level prices, and inevitably, the change in the inflation rate.
Inside the BOE is the Monetary Policy Committee, which was borrowed by the US’s Federal Reserve Open Market Committee. The MPC has several tools at its disposal, which include repo rates, and open market operations.
The repo rate is the return given to banks who keep excess reserves at the BOE. Raising the rate helps slow inflation, whereas lowering the rate increases inflation and economic activity. The Bank of England can also buy long-dated government debt to drive down public interest rates, and unlike other central banks, the BOE can even buy corporate debt to affect monetary policy. Typically, the link between government, central banks, and corporations is restricted in developed nations, so the UK is unique in this regard.
Forex investors should note that compared to the US Dollar and Euro, the GBP has much lower liquidity, which makes for higher volatility and thicker spreads between bid and ask prices. Typically, GBP pairs trade with a spread 1-2 pips higher than EUR or USD pairs.
Economic Indicators and Fundamental Releases
Unemployment Rate – The United Kingdom releases a monthly report on the status of unemployment within the economy. As always, a weak report indicates potential recession, whereas a strong employment report showcases future growth and economic strength.
Consumer Price Index – The BOE releases a CPI figure to measure inflation. Remember, the target for the CPI is 2% per year. Higher is considered too heavy on inflation, whereas lower rates are considered to be deflationary.
Consumer Confidence – Released by the Gfk, the consumer confidence report is a score calculated by the spending habits of local consumers. When consumers spend, they’re forecasting future ability to pay for their spending. When they cut back, consumers indicate that they’re expecting future weakness in their ability to consume. The UK has a very large service economy, much of which is dedicated to consumption.
Purchasing Managers Index – This reading seeks to find the confidence of purchasing managers within UK companies to invest in new employees, future business operations, and generally look forward to the future as being strong economically.
Pound Movers
Risk – Because the UK has a very strong finance industry, the Pound is often a safehaven currency. When international banks become concerned about the future, they bring their investments back home, to the UK, where they store their assets in Pounds.
Eurozone – Referencing back to the major trading partners for the United Kingdom, do notice that most of the UK’s economy is based on countries in the EU. If the EU economy weakens, the result is less purchasing of UK goods and services.
Interest rates – Since the UK is invested heavily in high finance, banks based in London are willing to invest internationally when interest rates make the investment a good opportunity. Likewise, bankers are willing to bring their investment capital back home to convert to pounds if the local rate is high.
