The fundamental factors that cause movements in the value of the sterling pound

When completing your investment strategy on the value of the sterling pound you will need to know all the factors that can influence the rate of this asset against other currencies on the Forex market. This is the reason why here we will explain the factors that absolutely need to be integrated into your fundamental analysis of this British currency.  

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The fundamental factors that cause movements in the value of the sterling pound

The commodities prices are correlated that the value of the sterling pound:

Firstly, we know that the sterling pound is positively correlated with the price of the energy commodities. In fact, this is because the United Kingdom is home to some of the largest companies worldwide in this industry sector such as British Petroleum for example.  

It should also be noted that the energy production alone generates more than 10% of this country’s GDP which explains why the sterling pound tends to show a positive correlation with the price of these energy commodities. It should be remembered that numerous members of the European Union import oil and petrol from the United Kingdom. Therefore, when the price of oil rises these buyers need to buy more sterling pounds to pay for the oil. Also, a rise in the oil price leads to significant profits for the different exporters of this country and therefore a rise in its GDP.

 

The volumes of the futures contracts on the EUR/GBP and their influence:

Of course, you should pay careful attention to the British interest rate which is one of the principal financial instruments of this country. Any potential movement in this rate will have a direct impact on the sterling pound against other currencies.        

However it should be remembered here that the BoE is one of the rare central banks worldwide that requires members of the monetary policy committee to publish their voting results. Here, the objective is above all to prove that the votes and comments of each of these committee members corresponds to their personal opinion and not the opinion of the energy committee. It is therefore necessary to also analyse other indicators relating to the probable movements in the interest rates set by the commission.

In fact, it is exactly these standardised three month futures contracts in Euros and sterling pounds that will reflect the market expectations in terms of interest rates over the same period.  We would also analyse these contracts with the objective of predicting the movements of interest rates in the United Kingdom, which will therefore indirectly affect the rate movements of the GBP/USD currency pair.

 

The influence of the British Treasury bond interest rate:

Another factor that exercises a certain influence on the movements of the sterling pound on the Forex market relates to the difference observed between the British treasury bonds, or gilts, and the foreign bonds as these rates are among the most followed factors on the market. In fact, Forex market investors closely monitor the spreads between the interest rates of these British treasury bonds and those of Germany or the spreads between the British bonds and the American treasury bonds interest rate. The latter can in particular be beneficial indicators relating to the volatility of the GBP/USD currency pair whereas the former clearly influence the EUR/GBP currency pair.       

In fact, the interest rate spreads will provide information on the returns of assets with a fixed income from the United Kingdom compared with fixed returns assets from other countries or economic zones, and the contrary. Relating to the European performance this is often based on the German Bund.        

Here, the spreads observed will enable traders to obtain the potential capital liquidity or possible currency movements given that the global investors always place their capital where they find assets that offer the most advantageous and therefore the highest possible returns.

 

Monitor all political events of the United Kingdom and politicians statements for the analysis of the sterling pound:     

Another important factor to take into consideration when trading in the sterling pound online is that political comments or major events relating to policy can have a strong and direct influence on the value of this currency so they should be closely followed. Brexit is a perfect example as all the news and events related to this incident have systematically led to a rise or fall in the value of the sterling pound on the Forex market.          

It should in fact be remembered that the day after the European referendum in June 2016, the sterling pound lost nearly 10% of its value in just one session against the U.S. Dollar. Against the Euro the GBP also lost 7% of its value.        

Generally speaking, it should be remembered that the markets, particularly the Forex market, more often reacts negatively to doubts and uncertainty. Therefore, all policy data that creates doubt or uncertainty or does not explain things clearly will tend to create anxiety in the investors that have purchased sterling pounds.

 

The economic data to monitor for an analysis of the pound sterling:

Clearly, we would also use all major economic information relating to the United Kingdom as a significant indicator. A country’s currency value is of course always influenced by the economic strength of the country itself.        

Of course, it is not enough to simply process just any data, on the contrary it is important to be able to distinguish and identify all major economic data and factors that will most influence this currency against other currencies on the market. Among the principal economic indicators to monitor we particularly note the following: 

  • The publication of the GDP which reflects the economic health of the United Kingdom in an overall manner.
  • Figures relating to retail sales.
  • Figures relating to the industrial production that enable the best insight into the future British economic growth.
  • Inflation figures that depend on other factors including the monetary policy of the United Kingdom.
  • Finally we would also monitor the trade balance which, depending on the import and export volumes, determines the buying and selling of the sterling pound.

 

Know the market sentiment on the sterling pound:

Another method frequently used to understand forthcoming trends of the sterling pound is to follow the advice of specialist analysts that are often banks or brokers.

Every day, the latter publish advice and opinions relating to the market sentiment of a particular asset such as a Forex currency pair and therefore the sterling pound.

These analyses are of course supplementary to any other indicators you may have taken into account.

 

Using a technical analysis to anticipate future movements of the sterling pound rate:

Of course, all the factors that we have cited above correspond to a fundamental analysis of the sterling pound. But these fundamental factors should certainly not be used alone. You should verify their validity systematically using a technical analysis.       

This will provide you with the indicators relating to the volumes traded, the strengths and direction of trends and the market volatility relating to this asset.

Frequently Asked Questions

Pounds sterling are issued by which entity?

Sterling pounds are theoretically legal tender only in England and Wales. They are issued by the BoE or Bank of England which issues the bank notes for both countries. The only bank notes that are legal tender in these countries are therefore issued by the BoE. However, practically speaking, sterling pounds are in circulation throughout Great Britain and the British Isles.        

On which financial market is the sterling pound quoted?

The sterling pound, as with all major currencies, is quoted on the foreign exchange market, also called the Forex. This currency is never quoted as a single rate but as part of a pair, as compared with other currencies. On the Forex you will therefore find numerous currency pairs such as the EUR/GBP which corresponds to the number of Euros for a single sterling pound or the GBP/USD which corresponds to the value of an American dollar expressed in sterling pounds.       

Is it possible to complete a technical analysis of the sterling pound?

Yes! By using the stock market charts of certain Forex currency pairs that include the sterling pound you will be able to complete a technical analysis of this asset. Currencies as assets are extremely volatile so it is important to complete a pertinent technical analysis, as well as a comprehensive fundamental analysis. The former will assist you by confirming or invalidating the signals obtained using the fundamental elements.   

76.4% of retail investor accounts lose money when trading CFDs with this provider. You should consider whether you understand how CFDs work, and whether you can afford to take the high risk of losing your money.