GBP: how much is the pound of the royal currency?

Today, trading the British pound requires the trader to have a solid knowledge of technical analysis and a quick reaction to fundamental events.

So, let’s get started.

Features of fundamental analysis

The independence of the UK financial policy from the European Union makes the pound a stable and secure asset. However, the idea of leaving the EU has politically weakened the currency long ago. Consider the main internal factors affecting the rate of the British pound.

Bank of England

A robust fundamental factor for GBP is BOE action. The monetary policy of the British central bank is quite transparent and aimed at keeping inflation at about 2%. BOE verbal interventions most often cause a weak reaction, since both politicians and members of the Monetary Policy Committee prepare the market in advance.

The BOE interest rate data are published monthly by the Monetary Policy Committee. If the rate does not change, the bank does not give any comments on this matter. If the bank changes the prime interest rate, the committee makes a particular statement, which is interesting for providing information on possible further actions of the Bank of England.

Indices of business activity

The consumer price index is published monthly by the National Statistics Service and is considered much more important - it is the Monetary Policy Committee that focuses on it when deciding to change the rate. The producer price index, as well as business activity indices (in the service, manufacturing, and construction sectors) affect the exchange rate only if there is a sharp deviation from the forecast.

GDP and retail indicators

This category usually includes quarterly GDP (preliminary, revised, final), retail sales, and the index of supply managers in manufacturing and services. The impact of GDP on the exchange rate is usually lagging behind. The faster the production and services develop, and the higher domestic demand, the stronger the economy is.

For the forecast, it is better to use indicators that either correspond to the cycle or are several months-retail sales ahead of it (published monthly) and various consumer confidence survey indices, such as, for example, the consumer confidence index from Gfk or from Nationwide.

Employment and Unemployment

The data are published monthly. Rising unemployment means a worsening economy and the possibility of lowering rates by BOE, that is, it is considered a negative factor for the pound.

Payment and trade balance

The trade balance is published monthly, the payment balance - quarterly. The balance surplus above the forecast, as a rule, leads to a growth of the GBP, if below - to a fall.

Public debt

Public debt for the British economy is of particular importance since now the trend towards its growth continues. In connection with the Brexit process, the risks of investing in the country are growing, which is bad for the pound’s rate. The greater the public debt, the higher the risk, and the more (ceteris paribus) the difference in the percentage differential will be required to lure investors into the country and the currency.

Brexit

After the start of the EU exit procedure, the BOE policy focuses on tightening monetary policy and raising interest rates, which was caused by a sharp increase in inflation. This means that until the final decision on Brexit, the emergence of “information throws” on this topic can break any analysis pattern.

Exit from the EU trade deal, as well as the loss of London’s clearing rights for operations with the euro, will be a strong blow to the British economy, and especially to the pound. In general, while negotiations are underway on Brexit, GBP trading remains dangerously speculative.

Correlation and cross-rates

Cross pairs with GBP have a high correlation between adjacent (unidirectional) currencies such as AUD, NZD and JPY, EUR and CHF. Such pairs are useful for trading in the price channel and in breakout strategies. It is necessary to conduct a thorough fundamental analysis of both assets included in the cross-rate (see Using Graphic Tools).

Several practical notes

For any trader, the main problem with assets involving GBP remains as of their strong dependence on fundamental factors. What’s the result? Given the complexity of the UK market situation before and after Brexit, as well as the increasing dependence on the euro, technical analysis of the GBP market as a source of trading signals is becoming unreliable.

All political events cause a strong but short-term reaction for the pound, after which the price returns to pricing models based on the state of the British economy. So, without a thorough, and most importantly, relevant, fundamental analysis, the British pound trading is contraindicated.