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Investing In The British Pound

The British pound is the 4th most traded currency in the world market behind the US dollar, the Euro, and the Japanese Yen, although it boasts being worth more than all three of its peers. In fact, the pound sterling or GBP has consistently been worth more than all the world currencies for a majority of the time it has been around and it is the world’s oldest currency still in circulation. For these two reasons alone, investing in the British pound is usually a sound investment.

In 1972, the United Kingdom decided to float the pound on the market to alleviate inflation at that time and it was supposed to be a temporary fix, however, the pound has remained floated ever since. Because it is a floated currency, and no longer tied to the US dollar, its value is driven by supply and demand. The demand for the currency depends on the health of the UK economy, interest rates, and the central bank’s (The Bank of England) monetary policy. The bank’s greatest power with monetary policy lies with determining interest rates and having the ability to print new money.

Investors interested in investing in the British pound can do so by purchasing assets tied to the pound. Currencies do not generate returns themselves, but by acquiring assets in the pound, an investor can profit off the asset from fluctuations in the pound. An investor can also buy and sell GBP futures traded in the Chicago Mercantile Exchange. Futures are more sensitive and leveraged to fluctuations in the currency, so they make better investments for someone looking to trade in currency. Companies on the stock market that benefit from a stronger pound are Tesco and banks. Those that benefit from a weaker pound are BP, Royal Dutch Shell and HSBC Holdings. Learning how to play the market and invest in these companies is wise if you wish to trade in the British pound.

On the Forex markets, the most active trading hours for the GBP are from the hours of 3:00AM EST/8:00 GMT (the opening hour for London’s market). It should be noted that the British pound tends to produce “fake-out” moves at the market open. This common behavior will move quickly in one direction from the very first moment of the market open, only to drastically move in the other direction just minutes after opening. Just as quickly, it will bring about a new trend and move back in the direction it started out as.

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Modified:01/24/2011
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