Factors Affecting GBP/USD (Cable)

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 2.5% annual growth in Retail Prices Index excluding mortgages (RPI-X). Hence, 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):

The BoE's Committee responsible for making decisions on interest rates. The Committee comprises of the following:

Mervyn King, Central Bank Governor
Andrew Large, Deputy Governor
Rachel Lomax, Deputy Governor
Charles Bean, Executive Director
John Vickers, Executive Director
Paul Tucker, Outside Expert
Kate Barker, Outside Expert
Marian Bell, Outside Expert
Richard Lambert, Outside Expert

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).

Gilts:

Government bonds known as gilt-edged securities. The spread differential (difference in yields) between the yield on the 10-year gilt and that on the 10-year US Treasury note usually impacts the exchange rate. The spread differential between gilts and German bunds is also important, as it impacts the EUR/GBP exchange rate, which could affect GBP/USD (see cross-rate effect).

3-month Eurosterling Deposits:

Eurodollar deposits are bank accounts deposited in a country other than the country of the currency. Ex: Japanese Yen accounts deposited outside Japan are called "Euroyen". Similarly, euro-denominated accounts deposited outside the Eurozone are called "EuroEuros". The interest rate on 3-month sterling-denominated deposits held in banks outside the UK. It serves as a valuable benchmark for determining interest rate differentials to help estimate exchange rates. Using a theoretical example on GBP/USD, the greater the interest rate differential in favor of the eurodollar against the eurosterling deposit, the more likely GBP/USD is to fall. Sometimes, this relation does not hold due to the confluence of other factors.

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).

Sterling and EMU Membership:

British Prime Minister Tony Blair often impacts the sterling when he makes vital references regarding Britain's possible membership into the single European currency, the euro. In order for Britain to join the single currency, UK interest rates will have to converge down to the levels of the Eurozone. If the British people vote in favor of adopting the euro (vote expected after 2001), the sterling will have to decline against the euro so as to achieve sufficient trade advantage for British industry. Thus, any signs (speeches, remarks or polls) indicating a closer UK to the euro, is expected to have a downward impact on the sterling.

Economic Data:

The most important economic data items released in the UK are: Claimant unemployment (number of unemployed); claimant unemployment rate; average earnings; RPI-X; retail sales; PPI; industrial production; GDP growth; purchasing managers; surveys (manufacturing and services); money supply (M4); balance of payments and housing prices.

3-month Eurosterling Futures Contract (short sterling):

The contract reflects markets expectations on 3-month euro sterling into the future. The difference between futures contracts on the 3-month eurodollar and eurosterling deposits is an essential variable in determining GBP/USD expectations.

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 (non-dollar exchange rates) such as EUR/GBP. To illustrate: 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). Conversely, reports indicating that the UK may not join the single currency project will hurt the EUR/GBP, thereby boosting cable.