Bank of England and the British Pound – What to Look For

 

Hello there, this is tradingpedia.com and this video deals with the Bank of England, one of the oldest central banks in the world, and the British Pound, of course – a currency that used to be the world’s reserve currency.

The British Pound

The British Pound lost its greatness as the British empire’s influence declined, but it still remains one of the man actors on the FX exchange board and one of the most powerful fiat currencies, especially after 1970’s Nixon shock. That is the moment when the fiat currencies started to free-float against another.

The British Pound or GBP is a currency very popular among traders. EURGBP, GBPJPY (a currency pair with a bigger average true range than usual), GBPUSD, also called the cable pair, after the cable laid down on the bottom of the ocean for the two financial centers, London and New York, to communicate, GBPAUD, GBPCHF, GBPCAD – they are all important currency pairs and they provide tremendous opportunities.

British Central Bank

What to consider when it comes to Bank of England? The Bank of England is one of the most conservative central banks in the world. Its interest rate decision come out on a Thursday every six week and there would be no press conference if there is no change in the interest rate policy. For this reason, especially in the aftermath of 2008-2009 Great Financial Crisis, traders had a hard time understanding the Bank of England policy because these guys met but they did not decide anything. So the question was – why meeting in the first place?

A central bank needs to meet in order to assess the economic developments before deciding what to do with the rates – keep them unchanged, cut them or raise them. So the Bank of England will release a statement and have a press conference only if there is a change.

Because of that, Bank of England uses the Inflation Letter instead of the press conference, to communicate to markets its intentions. Therefore, when the Inflation Letter comes out, there is a press conference with the Bank of England’s Governor discussing the developments and the press representatives ask questions.

Also, look for the PMIs when trading the GBP. In the UK there is one PMI for each crucial sector – services, manufacturing, and construction. If the PMI prints above 50, the sector expands, if it prints below, it contracts.

The bigger the distance from the 50 level, the bigger the expansion or contraction is. Out of the three sectors, the services sector is the most important one because the UK is a service-based economy, so the services sector has a bigger proportion in the UK’s GDP. Therefore, often you will see the PMI manufacturing data disappointing while the PMI services exceeding expectations and overall the GBP will move higher.

Inflation

Think of inflation in the United Kingdom. It matters the most for the GBP because it is part of the Bank of England’s price stability mandate. Higher inflation triggers higher rates and lower inflation triggers lower rates.

The Fed

Also, think of the Fed. It may come as a surprise, but the Bank of England always copied the Fed’s policies, especially after the second world war. So, if the Fed eased, the Bank of England followed. Or, if the Fed hiked, the Bank of England starts to talk hawkish.

There are some exceptions, like the last tightening cycle in 2018-2019 in the United States but that one now is viewed as a mistake. Therefore, Bank of England, by not copying the Fed’s decision, it was in a better position for the crisis to come.

Sum Up

Bank of England’s inflation letter, the PMIs, the GDP – but above all, consider the decisions taken in the last years. Brexit, the negotiations that followed, the uncertainty – all these play a crucial role for the pound. Like it or not, the United Kingdom is closer to Europe and the single market than the United States.

Volatility is bigger on the GBP pairs when compared to other pairs, spreads are bigger as well, GBPJPY is viewed as one of the pairs with the largest ATR, and the GBP used to be the world’s reserve currency but lost that status to the USD.

Thank you for being here – bye, bye.