The British pound sterling is one of the most heavily traded currencies on the foreign exchange markets. A staple of international finance, it is involved in 12.8% of daily forex turnover and is widely viewed as the quintessential base currency.
According to the Bank of International Settlements' (BIS) Triennial Survey (2016), the pound ranks as the fourth-most-heavily-traded currency behind the United States dollar (USD), euro (EUR) and Japanese yen (JPY). It also accounts for nearly US$650 billion in average daily turnover.
It's often referred to as the pound, Great Britain pound or British pound, and it's symbolised by a latin capital L (£). On the forex, it is referenced according to the International Organisation for Standards (ISO) code GBP.
The GBP is officially managed and regulated by central banking authority of the U.K., the Bank of England (BoE). The BoE is tasked with crafting monetary policy, promoting economic growth and issuing banknotes. Common BoE notes in circulation include the £5, £10, £20 and £50 denominations.
The History Of The British Pound Sterling
The origins of the British pound date to the 8th century and pre-feudalistic societies of northwestern Europe. Found predominantly in Anglo-saxon kingdoms, silver coins known as "sterlings" circulated as legal tender.
A specie-based monetary system prevailed in the U.K. until the mid-17th century and rise of goldsmith bankers in London. The goldsmiths extended loans, accepted deposits and issued banknotes redeemable for specie. The banking industry in London rapidly evolved and culminated in the creation of the BoE in 1694.
Established by King William III, the BoE served as the first central bank in history and was commissioned with financing war efforts against France. In the 12 days after the bank's creation, £1.2 million was raised, half of which was earmarked to strengthen the British navy.
Circa 1717, U.K. leadership decided to begin defining the pound's value in terms of gold instead of silver. However, it was not until the 1800s that the pound followed the German mark and became officially pegged to bullion at £4.25 per ounce. This arrangement lasted until the onset of World War I, when the gold standard was suspended to support military affairs.
Following WWI, Prime Minister Winston Churchill reinstituted the gold standard in 1925. The policy proved to be short lived as the U.K. permanently abandoned gold-backed money in 1931. The onset of the Great Depression and the onslaught of World War II bolstered the need for levels of government spending not permitted by the traditional gold standard.
Following the conclusion of WWII, the pound once again became linked to bullion, albeit indirectly. In 1944, the U.K. joined a group of allied nations in the signing of the Bretton Woods Accords. Bretton Woods designated both the USD and GBP as global reserve currencies. Nonetheless, the pound was to be fixed to the USD, which was in turn pegged to gold. The Bretton Woods monetary system remained in effect until 1971, effectively dictating the value of the pound.
Beginning in 1971 and through to the present day, the pound has experienced a collection of extreme ups and downs. The late 1970s brought uneasiness and International Monetary Fund (IMF) loans, sustained growth defined the 1980s and Black Wednesday ushered in the 1990s. Since 1992, the GBP has existed as a free-floating currency, independent of any pegs or fixing.
Economy Of The United Kingdom
The U.K. features extensive diversity in the financial, manufacturing and export sectors. Considered ta global economic superpower, the U.K. exists as a combination of English, Welsh, Scottish and Northern Irish resources. From the oil fields of the North Sea to the financial district of London, U.K. economic prowess is renowned the world over.
Within the context of the eurozone, the U.K. ranks as the third-largest economy behind Germany and France. Technically classified as a service-based economy, its gross domestic product (GDP) is especially dependent upon the banking, insurance and business-support sectors. In terms of GDP purchasing power parity (PPP), the U.K. ranks ninth in the world with an annual figure of US$2.925 trillion (as of 2017). The agricultural (0.7%), industrial (20.2%) and service (79.2%) sectors are the three primary components of aggregate GDP.
Exports play a significant role in the U.K. economy, and in turn, valuations of the GBP. The U.K. stands as the 10th-largest exporter of goods and services abroad. Outflows of manufactured goods, fuels, chemicals and foodstuffs head up the list of leading exports. Among the main destinations for these items are the U.S. (13.2%), Germany (10.5%), France (7.4%) and the Netherlands (6.2%).
Due to geographic separation from the eurozone, the U.K. is a premier importer of foreign goods and services. As of year-end 2017, it ranked as the fifth-largest importer in the world, accounting for US$615.9 billion annually. Machinery, crude oil and assorted food items serve as the main imports. Germany (13.7%), the U.S. (9.5%) and China (9.3%) are the top three providers of goods and services to the U.K.
Since 2000, economic times in the U.K. have been historically challenging. Far from the cyclical highs of the 1970s and 1980s, 2000 through 2019 brought a severe decline in GDP followed by relatively flat growth. Quarterly GDP ranged from 1.5% to -2.2%, due in large part to a sharp downturn in 2008 and the adopted austerity measures used to promote recovery.
The 2016 vote for Brexit threw the economy into a state of flux. Existing trade agreements and duties established with the countries of the European Union (EU) came into question. This brought an abundance of uncertainty to U.K./EU two-way trade, jeopardising the future viability of the U.K.'s £274 billion in annual exports and £341 billion in imports attributable to EU nations.
At its core, the U.K. is a medley of four unique nations; England, Scotland, Wales and Northern Ireland. In order to oversee the vast banking industry and diverse financial markets, regulators derive authority from the Financial Services and Markets Act of 2000 (FSMA). Under guidance from the FSMA, the financial industry falls under the jurisdiction of three bodies:
Bank of England: The BoE is tasked with crafting policy toward the GBP, resolving disputes and making recommendations to lawmakers.
Prudential Regulation Authority (PRA): The primary objective of the PRA is to promote the safety and security of the banking industry as it pertains to the broader financial system. In addition, the PRA ensures fair competition in the market-oriented services provided by licensed firms.
Financial Conduct Authority (FCA): The FCA is commissioned with promoting efficient capital markets, fair competition and consumer protection.
Collectively, these departments regulate a vast majority of the financial system in the United Kingdom. However, other regulators such as Her Majesty's Treasury are also involved in preserving the integrity of the GBP and U.K. monetary system.
Major British Pound Sterling Currency Pairs
Held as the fifth largest currency in the IMF's reserve basket, the GBP is one of the world's seven majors. It is frequently traded in tandem with the USD (GBP/USD) as a major pairing. The also pound garners the attention of traders as part of several minor pairs: the EUR/GBP, GBP/JPY and GBP/CAD. For adventurous forex participants, an exotic pairing with the South African rand (GBP/ZAR) is a common target for trade.
British Pound Sterling Bills And Coins
As the U.K.'s central bank, the BoE has the authority to issue banknotes accepted throughout the region. BoE bills are formally distributed in England and Wales, though seven banking institutions in Scotland and Northern Ireland are also permitted to issue banknotes:
Scotland: Bank of Scotland, Clydesdale Bank, The Royal Bank of Scotland
Northern Ireland: Bank of Ireland, AIB Group, Northern Bank Limited, Ulster Bank Limited
Since 1696, the BoE has produced and distributed paper money throughout Great Britain. Originally, the notes served as bearer bonds, convertible for gold deposits held in BoE vaults. Since that time, the notes have evolved from paper to polymer to provide enhanced security features.
Circulating bills issued by the BoE include the £5, £10, £20 and £50 pound notes. On the face of each is a portrait of the Queen of England, with various historical figures illustrated on the backside.
Beginning in 1489 with the Sovereign, the Royal Mint has been commissioned with the production of all coinage in Great Britain. Coins in circulation include the £5, £2, £1, 50p, 2p, 10p, 5p, 2p and one penny issues.
The British Pound Sterling Around The World
The pound serves as the official currency of U.K. members England, Scotland, Wales and Northern Ireland. Nine British territories also use the GBP: British Antarctica, the Falkland Islands, Gibraltar, the Isle of Man, Guernsey, Jersey, South Georgia, Saint Helena and the South Sandwich Islands. The GBP is frequently used side by side with a number of domestic currencies, but it does not serve as a peg.
Where Is The British Pound Sterling Today?
In the aftermath of the global financial crisis of 2008-2012, the GBP experienced a period of extended volatility. In an attempt to restore pricing stability and confidence in the U.K. economy, the BoE implemented a 10-year plan of quantitative easing (QE). The comprehensive QE program was spearheaded by near-zero interest rates and aggressive bond buying. To reduce a growing national debt, austerity measures were taken by the U.K. government and they included a reduction in federal spending and increased tax levies.
However, the GBP has struggled to regain its pre-2008 form. For the period of 2008-19, it has fallen by more than 40% against the USD and by almost 25% against the EUR. While the policies of QE and austerity are widely believed to have circumvented a depression, the GBP has suffered a prolonged devaluation.
The Brexit vote ushered in an era of uncertainty regarding the political future of the U.K. as well as the international status of the pound. Upon the vote to "leave" becoming official, the GBP experienced one of its worst days in recorded history and fell to a 30-year low. The Brexit transition process brought little comfort to the pound and presented a number of unique challenges. Leadership changes, heated E.U. "divorce deal" negotiations and deep Parliamentary divisions repeatedly undermined the stability of the pound.
Russell Shor (MSTA, CFTe, MFTA) is a Senior Market Specialist at FXCM. He joined the firm in October 2017 and has an Honours Degree in Economics from the University of South Africa and holds the coveted Certified Financial Technician and Master of Financial Technical Analysis qualifications from the International Federation…