Influencing Factors on GBP/USD
BANK OF ENGLAND (BOE) – Under the Bank of England Act of June 1997, the BoE obtained operational independence in setting monetary policy to deliver price stability and to support the government’s growth and employment objectives. The price stability objective is set by the government’s inflation target, defined as a percentage of annual growth in Retail Prices Index. Despite its independence in setting monetary policy, the BoE remains dependent upon having to meet the inflation target set by the Treasury.
MONETARY POLICY COMMITTEE (MPC) – Similar to the US Federal Reserve, the BoE’s Monetary Policy Committee responsible for making decisions on interest rates.
INTEREST RATES – The Central Bank’s main interest rate is the minimum lending rate (base rate), which it uses to send clear signals on monetary policy changes at the first week of every month. Changes in the base rate usually have a large impact on sterling. The BoE also sets monetary policy through its daily market operations used to change the dealing rates at which it buys government bills from discount houses (specialized institutions in trading money market instruments).
TREASURY – The Treasury’s role in setting monetary policy diminished markedly since the Bank of England Act of June 1997. Yet, the Treasury still sets the inflation target for the BoE and makes key appointments at the Central Bank. Gordon Brown: Chancellor of the Exchequer (Head of Treasury).
ECONOMIC DATA – The most important economic data items released in the UK are: Claimant unemployment (number of unemployed), Uemployment rate, Average earnings, Retail Price Index, Retail Sales, CPI, PPI,GDP, Industrial Production, Manufacturing, Balance of Payments, and Housing.
FTSE-100 – Britain’s leading stock index. Unlike in the US or Japan, Britain’s main stock index has relatively less influence on the currency. Nevertheless, the positive correlation between the FTSE-100 and the Dow Jones Industrial Index is one of the strongest in the global markets.
CROSS RATE EFFECT – GBP/USD is sometimes impacted by movements in cross exchange rates such as the EUR/GBP and GBP/JPY. For instance, a rise in EUR/GBP (fall in sterling) – triggered by strengthening expectations of UK membership into the euro – could lead to a decline in GBP/USD (cable).
ADDITIONAL FACTORS – Gilts (Government bonds known as gilt-edged securities), 3-month EUR/GBP Deposits & Futures Contract.