The GBP (Pound Sterling) is one of the most popular currencies traded in the forex market. It is no wonder because GBP, the home currency of the United Kingdom, is the oldest actively traded currency on the forex market. As such, it has a rich history and enjoys great popularity. Further, London is one of the largest forex markets in the world and this has also made the GBP a preferred choice of the forex traders.
Owing to its familiarity and popularity on the forex market, quite often the newcomers to the forex market choose the GBP as their preferred currency for trade. Although GBP is one of the most popular and actively traded currencies in the forex market, you must not get into trading it without understanding the factors that indicate its movements. If you trade on fundamentals, you should know which reports to follow so that you can make your decisions accordingly.
There is more to forex trading than just making your decisions based on some economic reports and news events. This article discusses the 10 most important forex indicators for GBP so that you can take an informed decision when you trade it next time.
Point to note
Before we get into the details of the indicators, it is important to know that every currency traded on the forex market is generally affected by the same fundamental economic factors. Five main factors tend to affect all currencies the most. They are monetary policy, price inflation, confidence and sentiment, economic growth (as indicated by GDP), and the balance of payments.
You can use these five factors as a template along with a few others discussed in this article to make your decision. All these will help you to gain comprehensive information on the direction of the currency – GBP in this case.
Forex indicators for GBP
Let’s now consider the forex indicators for GBP in detail.
1. Gross Domestic Product
The gross domestic product or GDP of a country is one of the key indicators of its economic performance. It focuses on the value of the entire goods and services produced in the country. This assessment of the economic output and activity is a key indicator of a country’s development and future growth. Hence, the GDP figures are considered as a critical influencer in the price movement of the home currency. A healthy GDP could facilitate an upward price movement in the forex market.
You must be aware of three GDP reports – Preliminary GDP, Revised GDP, and Final GDP. The Preliminary GDP estimate will be released the earliest and has the biggest impact as it gives traders the first look into the economic health of the U.K. However, it is the least accurate of the trio as it tends to be revised in the follow-up Revised GDP and Final GDP reports.
This is another key forex indicator of any currency, including GBP. Any variation in the inflation figures influences the exchange rates of GBP. If the inflation rate is low in the UK, it will have a positive impact on the exchange rate of the Pound Sterling. A stronger exchange rate means better purchasing power on other currencies. On the other hand, if there is high inflation, the exchange rate is likely to fare poorly with the exchange rates of GBP depreciating in contrast to other currencies.
Inflation is also linked to higher government debt. A nation with higher national debts has less appeal for attracting foreign investment. This, in turn, might lead to an increase in interest rates.
3. Interest rates
Another key indicator that influences the foreign exchange rate is the interest rates prevalent in an economy. The higher the interest rates, the greater the chances of investment appreciation attracting foreign investment. This will lead to an appreciation of the home currency exchange rates. Known as “hot money flow”, this is a key factor contributing to a currency rate appreciation in the short term. However, falling interest rates can render the market unfavourable for foreign capital investment. But this may lead to inflation and a fall in exchange rates which may lead to increased interest rates.
4. Current account
The current account of a country gives a clear picture of its economic health. It gives you an idea of the balance of trade and particulars of the import and export with other countries. If there is more buying and less selling, it will result in a trade imbalance and a current account deficit. A current account deficit indicates that the country imports more than what it exports. It will require higher foreign capital, lead to an increased foreign currency rate and a decrease in the local exchange rate.
In this context, it is important to remember that while the current account deficit impacts the foreign exchange rate, it does not always mean a weaker currency. The infusion of foreign debt can result in surplus money that can be invested.
5. Unemployment rate
The unemployment rate is linked to several economic indicators like the GDP, industrial production, retail trade, consumer price index, inflation, and interest rate. Furthermore, the interest rate is closely linked to the forex market. Lower unemployment means higher demand for goods and services, which will lead to price rises and inflation.
6. Consumer price index
The Consumer Price Index (CPI) is another key economic indicator that impacts the forex market and thereby the GBP. In the UK, the Consumer Price Index (CPI) is compiled and released by the Office for National Statistics. This data is reflective of the country’s economic growth from the perspective of consumer behaviour. As the CPI is related to the changes in the price of goods and services in connection with the purchasing power of the consumer, it is linked to inflation levels too. This has a direct correlation with the monetary policy of the BOE's inflation target and the prevalent interest rates. The future monetary policy action could significantly affect the GBP, which will impact the forex market too. GBP will perform corresponding to the CPI of the UK.
7. Industrial production
This is another economic activity that affects the GBP performance due to its sensitivity to consumer demand and interest rates. Industrial production measures the output and activity of the industrial sector such as manufacturing, mining, gas, electric-based industries, and so on. If the industrial production reading beats the forecast, the GBP will have a bullish run and vice versa.
8. EU industrial production
Even though Britain has left the EU, the industrial production in the EU is still impactful on the GBP. Among the EU nations, the industrial production of Germany influences a lot as it is one of the strongest economies of the union. The production levels and the output of goods and services generated in the EU, especially in countries like Germany has an impact on GBP on the forex.
9. PMI index - services and manufacturing
PMI Services and Manufacturing or Purchasing Managers' Index (PMI) is a compilation of various surveys on economic trends in the manufacturing and service sectors. This helps in forming an opinion on the economic growth of the country. The survey focuses on areas such as new orders, inventory levels, production, supplier deliveries, and employment, among others. You can use the PMI to your advantage as a higher reading is bullish for the GBP and vice versa.
10. Retail trade
This is a top indicator of consumer spending. It offers information on how consumers spend money on various durable and non-durable goods and services over a period. Higher retail sales figures generally indicate positive movements. Like GDP, retail trade is further broken into various sectors and you can use the figures to assess opportunities. An index that beats the projected reading has a bullish effect on the GBP and a weaker reading has a bearish effect.
As you can see, several economic indicators can affect the GBP. Knowing which data reports to utilise is the first step towards trading the GBP successfully. If you can interpret and combine reports to generate a trading direction, you will succeed. However, for a novice trader, the best way ahead will be to base your pound-based trades on fundamental reports. The above-mentioned indicators offer a good place to start.
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