Forex Walkthrough

Level 5 Economics - British Pound

British Pound (GBP)
Central Bank: Bank of England (BoE)
Current Interest Rate: http://www.bankofengland.co.uk/

Her Majesty's Currency
As the primary governing body in the United Kingdom, the Bank of England serves as the British equivalent to the Federal Reserve System. Like the Fed, the governing body establishes a committee headed by the governor of the bank. Made up of nine members, the committee is comprised of four external members (who are appointed by the chancellor of exchequer), a chief economist, committee chief economist, director of market operations and two deputy governors.

The Monetary Policy Committee (MPC) holds meetings every month where it decides on interest rates and other monetary policies, with chief considerations given to the total price stability in the British economy. As such, the MPC also sets a benchmark of consumer price inflation. If this benchmark is not met, the governor has the unenviable task of notifying the chancellor of exchequer through a letter, one of which came in 2007 as the U.K.CPI rose quite sharply during the year. The release of this letter tends to be an indication to the markets of probable contractionary monetary policy. (For more on the role of the CPI, read The Consumer Price Index: A Friend To Investors.)

With a greater degree of volatility than the euro, the British pound (GBP, also sometimes referred to as "pound sterling" or "cable") often trades within a wider range through the day. With swings as large as 100-150 pips, however, it is not unusual to see the pound trade as narrowly as 20 pips. Swings in popular cross currencies can give this major a volatile reputation, with traders focusing on pairs like the British pound/Japanese yen and the British pound/Swiss franc. As a result, the pound can be seen as most volatile through both London and U.S. sessions, with smaller movements during Tokyo hours (7pm - 4am EST). (Read more about currency pairs in Using Currency Correlations To Your Advantage.)


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