Understanding The GBP - All You Need to Know
The British pound, also called the pound sterling, is one of the most traded currencies in the world. After the US dollar, the British pound is the second most actively traded currency. The popularity of the pound comes from its long history and importance. It is also one of the oldest currencies still in use.
The History of the British Pound
The British pound has a long history, dating back to the 13th century. Originally, it began as a unit of account, a way to measure value, in the year 1266 under King Henry III. It was not a physical coin at first.
Later, in 1544, the pound became an official currency in England. Then, in 1558, the pound sterling was adopted as the official currency of Great Britain. The pound is now the fourth-most-traded currency in the world, with a daily trading volume of over $1.8 billion.
The Pound and the Gold Standard
For a long time, the value of the British pound was tied to the price of gold. This was known as the "gold standard," where the amount of currency in circulation was linked to how much gold the country had. This system was first put in place by the Bank of England. It meant that the pound’s value did not change too much because it was backed by gold, a stable resource.
However, during World War II in 1943, the gold standard was abandoned. The country needed more money to finance the war, and so it was no longer tied to gold. In 1968, the UK linked the pound back to gold for a short time, but in 1972, the pound was devalued. It was then tied to the US dollar and other major currencies instead of gold. In 1979, the British pound became a free-floating currency.
The British Pound Today
Nowadays, the pound sterling is what is called a fiat currency. A fiat currency means that it is not backed by a physical resource like gold or silver. Instead, its value comes from the trust people have in the government that issues it. The value of the pound changes daily depending on how much people want to buy or sell it in the market.
Countries That Use the British Pound
The British pound is the national currency of the United Kingdom, but it is also used in other places. There are 14 British Overseas Territories that also use the pound sterling. These include places like Bermuda, the British Virgin Islands, the Cayman Islands, and Gibraltar.
How the British Pound Works in the Market
The British pound plays a big role in the global foreign exchange market or Forex market. This market is where people trade different currencies, and the pound is one of the most traded currencies. Many investors and traders choose to trade the pound because it is flexible, liquid (easy to buy and sell), and offers good profit opportunities.
Like other currencies, the value of the pound goes up and down based on various factors. These factors include the strength of the UK economy, the actions of the Bank of England, and what happens in other countries. When the UK economy is doing well, the value of the pound often goes up. But if there are problems in the economy, like high unemployment or inflation, the pound may lose value.
Major Factors that Affect the British Pound
To understand how the pound might change in value, it helps to look at some key factors that affect it.
1. Interest Rates:
The Bank of England is in charge of setting interest rates for the country. If the Bank raises interest rates, the pound usually becomes stronger because higher rates attract more investors. On the other hand, if the Bank lowers interest rates, the pound may weaken.
2. Inflation:
Inflation is when the price of goods and services goes up over time. If inflation gets too high, the pound may lose value. The Bank of England has an inflation target of 2%. If inflation rises above this level, the Bank may raise interest rates to control it.
3. Unemployment Rate:
The unemployment rate shows how many people in the UK are out of work. A high unemployment rate often means the economy is weak, which can hurt the pound's value.
4. Trade Balance:
The trade balance is the difference between how much the UK exports (sells to other countries) and imports (buys from other countries). If the UK imports more than it exports, it has a trade deficit, which can weaken the pound.
What is the Best Time to Trade the British Pound?
The pound is traded 24 hours a day, but the best times to trade it are during certain hours. The most liquid trading time for the pound is during the London trading session, which takes place between 4:00 AM and 10:00 AM GMT. This is when the pound is traded the most, and you are more likely to see large price movements.
Traders also trade the pound during the overlap of the London and New York sessions, which occurs from 12:00 PM to 4:00 PM GMT. During this time, the pound is traded against the US dollar, creating good opportunities for traders.
The Importance of the British Pound
The British pound is a very important currency because it is used in many global transactions. It is also a major reserve currency, held by many central banks around the world. Around 31% of the world’s reserves are in the British pound. This makes it one of the most significant currencies in the global economy.
The pound is not just important for big investors. It is also widely used by ordinary people in their daily lives, whether for travel, trade, or online shopping.
The British pound is a fascinating and powerful currency with a long history. It remains one of the most traded currencies in the world, offering many opportunities for traders and investors. Understanding the factors that influence the pound’s value, can help you make better decisions if you are interested in trading the pound.
Whether you are new to Forex trading or experienced, keeping an eye on the British pound can give you insights into global economic trends and help you make the most of your trading strategies.