Important Economic Indicators for the GBP
Consumer Price Index (CPI) – The BOE looks at this account as a measure of inflation. It measures the change in prices of consumer goods.
Unemployment Rate – This is the measure of how many unemployed people there are in the UK economy. Analysts look at this account carefully because it could be a leading indicator of future spending.
How come? Well, if a person has no job, he has no money. Without any money, nobody would be able to afford tea time!
Gross Domestic Product (GDP) – This figure reflects the state of the UK economy. It indicates whether the economy is growing and booming, or if it is stuck in the English Channel and drowning.
Purchasing Managers Index (PMI) – This index surveys business managers and asks them their view of the current economic landscape. Scores above 50.0 indicate improving conditions which may lead to expansion, while scores below 50.0 hint at possible contraction.
Gfk Consumer Confidence report -This report gauges consumers’ confidence about current and future economic conditions.
The more confident consumers are regarding the state of the UK economy, the more likely that they will be willing to spend.
What Moves the GBP
Changes in Monetary Policy
Many investors look at the pound for higher-yielding assets and for carry trades. Changes in the MPC’s interest rate alter sentiment towards the pound as it affects the yield of British securities.
In addition, changes in the bank repo rate also reveal the BOE’s outlook on the economy.
If the BOE officials feel that the economy is hurting, they will either expand quantitative easing measures or cut interest rates, which will signal to the public that the economy is unstable.
If the BOE feels that the economy’s rise may lead to inflationary pressures down the road, they may cut back on quantitative easing or hike interest rates.
Developments in the eurozone and US
Like other currency pairs, GBP/USD is also heavily affected by developments in the eurozone and U.S. U.S. economic data directly affect investors’ and traders’ sentiment in the market.
Good or bad data from the U.S. can either send market participants running to the GBP on increased risk appetite or looking for safety in the USD on account of risk aversion.
The Spill-Over Effect
The eurozone accounts for a majority of the U.K.’s trade relations. Because of this, you should also keep your binoculars ready to see any developments over on the mainland (Remember, the U.K. is an island!).
Any bad news or poor economic performance could potentially lead to bearish sentiment towards the GBP.
Driven by Risk Sentiment
Albeit small, the GBP benefits from the fact that it boasts a higher interest rate than other major currencies.
When traders are in search of greater yields, they will look to the U.K. because of the potential of getting a higher return on their investments.
When traders want to unwind their high-yielding investments and look for USD-dearest, they will start selling off the GBP.