After the American dollar and the European Euro forex rates, the Great Britain Pound is possibly the next most important currency in the forex market. The importance of the Great Britain Pound is not really that surprising because the United Kingdom’s economy is the fifth largest in the world.
Moreover, London is considered to be one of the most popular and central financial centres in the world because of its prime location and great history. Thus, the attention that the forex rates of the Great Britain Pound get in the forex market is fully valid.
In fact, it is even possible that you are planning to enter the forex market and target a currency pair where one of the currencies is the Great Britain Pound or GBP. For instance, the reason for your increased attention to the GBP could be that you plan on being a carry trader which makes the currency pair GBP/JPY very important for you.
In order to truly understand this currency pair, you need to understand the driving factors behind both these currencies. Here are the major fundamentals working behind the movements of the GBP’s forex rates.
Interest Rate Changes in the UK
As mentioned earlier, the GBP is largely targeted by carry traders, which is why they pay even more attention to interest rate changes in the UK than trend traders do. However, the impact of changing interest rates is the same on the forex rates of the GBP i.e. when they go up the value of the GBP increases and vice versa.
Decline or Rise in UK’s GDP
Owing to the fact that the UK has not joined the European Union it is free to choose its own economic policies. This means that while you would focus on the EU’s and Germany’s GDP growth rate for projecting forex rate of the European Euro, the GBP’s forex rates can be projected solely on the GDP numbers of the UK.
Trade Balance Numbers
The UK has two major trading partners which include the Eurozone and the United States of America. The trade balance numbers of the UK thus are a reflection of how the country is exporting and importing in terms of these partners. Needless to say, if the trade balance of the country is rising then forex rates of the GBP can be expected to appreciate as well.
Consumer Price Index
As you may already know, the Consumer Price Index is primarily used to figure out how much inflation exists in any economy. These numbers of the UK hence have a major impact on the forex rates of the Great Britain Pound. If these numbers are low then you can expect the GBP to appreciate but if they are high then expect the prices to contract.
Minutes of the BoE Meetings
Virtually everybody knows the story of George Soros and the BoE or the Bank of England. Most traders of the GBP keep an eye on the minutes of BoE meetings in the hope that it will reveal to them future moves of the BoE.