Foreign exchange, or forex, trading is an increasingly popular option for speculators. Ads boast of "commission-free" trading, hour market access, and huge potential gains, and it is easy to set up simulated trading accounts to allow people to practice their trading techniques.
With that easy access comes risk. It is true that forex trading is a huge market, but it also true that every single wannabe forex trader is going up against thousands of professions working for major banks and funds.
It is not a market for the unprepared, and investors would do well to do their homework beforehand.
In particular, would-be traders need to understand the economic underpinnings of the major currencies in the market and the special or unique drivers that influence their value. Introduction to the British Pound The British pound also called the pound sterling is one of the most economically and financially important currencies in the world. The pound is the fourth-most traded currency in terms of turnover and it is the third-most widely held reserve currencies among the countries of the world.
The pound holds a significant place in economic history, as it was once the world's dominant currency and held the position now owned by the U. The pound also holds an interesting place in the history of hedge funds and currency speculation.
Britain joined the European Exchange Rate Mechanism in , a "semi-pegged" exchange rate system in Europe that was meant to ease some of the volatility in exchange rates and prepare the way for a single currency. Unfortunately, the system did not provide the advertised benefits and Britain experienced both recessionary pressures and high outflows from the Bank of England in a vain effort to maintain the stated rate. Currency speculators, led most famously by George Soros, bet that this rate could not hold as economic conditions made it unsustainable and aggressively shorted the pound.
All of the major currencies in the forex market have central banks behind them, and the pound is managed by the Bank of England. The pound is one of the world's most popular traded currencies, and is heavily impacted by these factors. More potentially worrisome has been the recent increase in debt as a percentage of GDP. Since , though, debt has increased sharply.
While Britain does belong to the European Union, it is not a member of the Eurozone, meaning that it retains complete sovereignty over its fiscal and monetary policy.
Even by the standards of Europe, though, the U. Perhaps not surprisingly, then, Britain is seen as a viable alternative for companies wishing to raise capital without the expenses and hassles of complying with U. Britain has generally pursued pro-business policies and is a major global competitor in advanced industries like pharmaceuticals and aerospace, as well as services like banking, finance, advertising and accounting.
Britain is an aging country, but has a globally competitive workforce. While the United States is Britain's largest single trading partner, Europe as a whole is a major source of both imports and export demand. Consequently, economic conditions and policies in Europe have a major impact on the economic health of the U. Drivers of the British Pound Economic models designed to calculate the "right" foreign currency exchange rates are notoriously inaccurate when compared to real market rates, due in part to the fact that economic models are typically based on a very small number of economic variables sometimes just a single variable like interest rates.
Traders, however, incorporate a much larger range of economic data into their trading decisions and their speculative outlooks can themselves move rates just as investor optimism or pessimism can move a stock above or below the value its fundamentals suggest.
Major economic data includes the release of GDP, retail sales, industrial production, inflation and trade balances. These come out at regular intervals and many brokers, as well as many financial information sources like the Wall Street Journal and Bloomberg, make this information freely available. Investors should also take note of information on employment, interest rates including scheduled meetings of the central bank , and the daily news flow — natural disasters, elections, and new government policies can all have significant impacts on exchange rates.
Along similar lines, traders frequently monitor major commodities like oil, natural gas, and grains as bellweathers for possible inflationary pressures. Britain is also a major destination for global investing, and those flows can certainly influence exchange rates. Britain has increasingly become a favored alternative destination to New York for raising capital and that activity influences the currency.
The carry trade is not a tremendously significant factor for the British pound. These speculators took big positions - and scored huge profits - in the currency market. Unique Factors for the British Pound As the third-most widely held reserve currency, the British pound holds a place of significance that seems somewhat outsized to its economic role in the world. Part of this is no doubt due to the country's status as a financial trading center and financial capital for Europe, but some of it is also due to the country's long history of global leadership.
While this perception certainly ebbs and flows on the basis of which party rules the country and the extent to which those policies favor or curtail public spending and transfer payments , there is nevertheless a widely held view that the U. It is also worth noting that the pound is one of the relatively few currencies that is worth more than the U.
The Bottom Line Currency rates are notoriously difficult to predict, and most models seldom work for more than brief periods of time. While economics-based models are seldom useful to short-term traders, economic conditions do shape long-term trends. Britain may be small in terms of its population and land mass, but it is a major global economy with a very long and rich history of global economic leadership. As a strong alternative to the dollar it is likely that the pound will remain a preeminent global currency for some time to come.
Find out what makes currency swaps unique and slightly more complicated than other types of swaps. See Currency Swap Basics. Dictionary Term Of The Day. How much a fixed asset is worth at the end of its lease, or at the end of its useful Broker Reviews Find the best broker for your trading or investing needs See Reviews.
Sophisticated content for financial advisors around investment strategies, industry trends, and advisor education. A celebration of the most influential advisors and their contributions to critical conversations on finance. Become a day trader. Popular Forex Currencies With that easy access comes risk.
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