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Trading the British Pound

The British Pound or GBP, also widely known as Sterling, is the fourth most traded currency in FX markets, after the Big Three (the US dollar, the euro, and the Japanese yen). The pound is also favoured by central banks, which frequently keep a substantial allocation of sterling on their books.

Ever since the euro was introduced, UK governments have continued to be vexed with arguments over whether the country should join the euro bloc, but so far Britain has resisted.

More recently, however, the Bank has embarked on a process of ‘quantitative easing’ designed to help stimulate the UK economy by printing money to buy up debt. This has led to higher interest rates, but with UK base rates so low already, it had few other options.

The decision in 1997 by the Labour government of Tony Blair to allow the Bank of England independent powers to set UK interest rates means that the pound has become less susceptible to the sorts of politically-inspired crises that have affected the currency in the past, like the 1976 sterling crisis (when the UK was bailed out by the International Monetary Fund), or the forced withdrawal of the pound from the European Exchange Rate Mechanism (ERM) in 1992.

The pound is regarded as a relatively responsibly-managed currency at the moment, and FX investors have a high degree of confidence in the track record of the Bank of England in managing the currency since 1997. The Bank has been tasked with keeping UK inflation rates below 2% and the governor of the Bank of England must write an open letter to the Chancellor of the Exchequer (the UK finance minister) every month it fails to do so.

The pound is most frequently traded with the US dollar and the euro.  The GBP/USD currency pair is often referred to as ‘cable’ by FX experts on account of the transatlantic cable that was once used to communicate currency prices in the days before satellites. The European Union remains the UK’s biggest trading partner, followed by the US.

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