UK Currency Guide: British Pound Sterling (GBP)

What does GBP stand for?

GBP is the official abbreviation for the Great British pound.

Latest GBP News

• GBP: Testing times for sterling
• GBP: Dissenting voices
• GBP: Strong start but risks still to come

Why does the pound move in value?

Currency pairings (e.g. GBP/USD, USD/JPY) move in value every minute of the working day – although not generally at weekends or when the currency markets are closed for public holidays like Christmas.

Currency movements are usually based on the strength of the country’s economy. The stronger a nation’s economy is viewed by traders and investors, the higher the value of the currency compared to other nations’ currencies.

5 factors that could affect the value that traders place on a currency include:

1. Interest rates: If the Bank of England raises interest rates, or is predicted to do so, that normally increases the value of the pound.
2. Economic data: Every working day, governments and other organisation release data that shows the performance of the country’s economy. For example, employment vs unemployment, wage levels, house prices, gross domestic product (GDP), balance of trade, industrial production etc.
3. Business optimism: An important gauge of future economic performance is the optimism of business leaders. Surveys are taken and the results released, which are analysed by traders for signs of the health of an economy.
4. Politics: A vital determinant of economic performance (as seen by currency traders) is peaceful, stable government that supports the aims of business. Therefore elections, referendums and other political shocks will affect the strength of a currency. We saw that, for example, with Brexit, which weakened the pound.

Global news: As we saw with the Covid-19 pandemic, unforeseen events can drastically affect an economy.

What is pound sterling?

The pound is the oldest currency in continuous use and the fourth most traded in the world. Until the rise of the US dollar in the mid-20^th century it was the world’s reserve currency.

The pound took over from the penny as the official coinage in 1489, with at that time, 100 silver pennies to each pound.

In 1694 paper notes were introduced, with their value based on gold. As other currencies came to base their currencies on gold too – the “gold standard” – so trading between currencies was possible.

In 1971 the currency was decimalized, so that the pound is now made up of 100 pennies (“pence”).

At the same time, it was no longer “pegged” to the US dollar and floated freely in the market.

Pounds sterling

You will often hear GBP referred to as “pounds sterling”. This is both its official title and to differentiate GBP from other pounds, such as the Egyptian (EGP).

Why is the pound called sterling?

Opinions differ, but the name has been in use since early medieval times. Possibly it is because the “pound” was the value of several hundred silver pennies, named sterlings.

The pound became known officially as a unit of currency in 1489.

Pounds, not “sterlings”

You might say, “we accept payments in sterling”, but the unit remains the pound, so a price would always be 10 pounds, or £10, never 10 sterlings.

Control of GBP

GBP is a “floating” exchange rate, meaning that it finds its own value according to market movements and investment flows.

The government and Bank of England can influence the value of GBP, for example by using its own foreign exchange reserves or borrowing to intervene in the foreign exchange markets, but in general it is left to the market.

For any questions on how to manage your currency risk, information on how to register or how to make a trade with us, please don’t hesitate to call our team on 0808 163 0102 between 8am and 6pm, Monday to Friday.

The Bank of England and monetary policy

www.bankofengland.co.uk

Governor, Andrew Bailey.

The Bank of England is required by the government to keep inflation (rising prices) stable and no higher than 2% per year. Its secondary aim is to encourage the UK economy to grow.

It seeks to achieve this by “monetary policy”. That is, firstly, using bank interest rates to encourage or slow down spending. Secondly, using quantitative easing (QE) to create money digitally.

Interest rates are vote on by the Monetary Policy Committee (MPC) which is a nine-member panel that meets eight times a year (roughly every six weeks). See the dates for 2024 and 2025.