Forex Market in United Kingdom

Currency: Great British Pound
Common Name: Sterling, Cable
Quotation Convention: 4 decimal points
Most liquid cross: GBP/USD
Average Bid/Offer: 4 pips (1.7000 / 1.7004)
1 pip: 0.0001 USD
Settlement: Transaction plus two days (T+2)

Economic Indicators for the United Kingdom

• Employment
  
• Gross Domestic Product (GDP)
  
• Industrial Production
  
• Purchasing Managers Index (PMI)
  
• Retail Price Index (RPI)
  
• U.K. Housing Starts
  

Economic Overview
The U.K. has the seventh largest economy in the world, with a 2005 GDP of US$1.867trl. GDP growth rates slowed from 2001 to 2005, as the high value of the pound and the global downturn hurt the U.K.'s manufacturing and exports. The per capita GDP was estimated to be $30,900 in 2005.
The U.K. is the world's fifth largest importer and the seventh largest exporter. Important trade partners include the U.S., Germany and France. The U.K. has a fairly large trade deficit of $111 billion, and the world's second largest national debt, at $US7.107trl.
The U.K.'s agricultural industry is highly efficient compared to other European countries and produces about 60 percent of the country's food needs with only 1.5 percent of the labor force. Service-oriented occupations such as banking, insurance and business services comprise 79.5 percent of the labor force, and account for the largest portion of the country's GDP. The U.K. has significant coal, natural gas and oil reserves; primary energy production accounts for 10 percent of GDP, one of the highest shares of any industrial nation.
During the past 20 years, the U.K. government has greatly reduced public ownership and limited the growth of social welfare programs. The government has raised public taxes to support education, transportation and health services.
The U.K. economy is one of the strongest in Europe, with relatively low inflation, unemployment and interest rates. Although the U.K. is a member of the European Union, recent public opinion polls have shown that the majority of citizens oppose the U.K. joining the European Monetary Union and adopting the euro, due in large part to the strong performance of the U.K. economy.

Economic Policy Makers and Tools
The Bank of England (BoE) is the central bank of the U.K. The Bank of England was founded in 1694, nationalized in 1946, and gained independence in 1997. The overall goal of the BoE is to promote and maintain monetary and financial stability to contribute to a healthy economy. The BoE has exclusively issued the country's currency since the 1900s, and has been responsible for setting the U.K.'s interest rate since 1997.
The Bank of England's monetary policy committee sets interest rates to meet the inflation target for the U.K. economy. The inflation target is set annually by the Chancellor of the Exchequer, and the BoE implements its interest rate decisions by setting the bank repurchase (repo) rate, which is the interest rate at which the BoE lends to banks and other financial institutions. This is the key rate used in monetary policy to meet the inflation target. The monetary policy committee holds monthly meetings, which are often followed by announcements stating changes in monetary policy and interest rates. The committee also publishes two quarterly reports, the Inflation Report and the Quarterly Bulletin. The report provides growth and inflation forecasts for the following two years, and the bulletin provides analysis of the international economic environment and the impact on the U.K.'s economy.
The Bank of England's open market operations are typically conducted daily through two rounds of operations at the official bank repo rate. If these operations are not sufficient to relieve any liquidity shortage, then there is also an overnight operation and a late repo facility for settlement banks. Overnight operations are conducted at a higher rate than the official rate. The BoE also makes a daily overnight deposit facility at a lower rate than the official rate available to its counterparties. These overnight rates set the upper and lower bands of the market rates and are designed to allow active trading but moderate undue volatility, which could complicate banks' liquidity management and deter the use of money markets by non-financial companies.

British Pound vs. Euro
Monetary policy regarding the argument for and against the adoption of the euro is closely followed. Because the U.K. is presently implementing successful monetary and fiscal policies, the country has outperformed most major economies, including the EMU. The majority of voters see no reason for the U.K. to join the EMU, especially since the EMU has faced problems with implementing a single monetary authority for its 12 member countries.
Government officials in the U.K. are highly concerned with voter approval ratings. If voters do not fully support entry into the EMU, the likelihood of entry greatly declines. Any speeches and comments from government officials regarding the EMU, especially from the U.K.'s prime minister or treasury chancellor, and relevant public opinion polls, will impact the currency markets. Favor toward adopting the euro tends to put downward pressure on the British pound (GBP), while opposing entry typically boosts the GBP. In order for the U.K. to adopt the euro, interest rates would have to decrease significantly, and an interest rate decrease would encourage traders to sell GBP. The British pound would also weaken because of the uncertainties involved in deciding to adopt the euro.

Characteristics and Trends

• GBP/USD is one of the most liquid currency pairs in the world, with 6% of all currency trading involving GBP as either the base or counter currency.
• GBP has one of the highest interest rates among major markets.
  
• Interest rates between U.K. Gilts/U.S. Treasuries and UK Gilts/German Bunds are watched as potential currency movement indicators, as they indicate the differentials in premium yield in fixed income assets.
  
• Three-month Euro-sterling futures are watched to predict U.K. interest rate changes, which affect GBP values.
  
• Energy production makes up 10 percent of the U.K.'s GDP, which results in a positive correlation between the energy prices and the GBP.