British Pound Index
The British Pound Index assesses the value of the GBP by weighing it against a group of comparable currencies. This guide to trading the Pound Sterling Index explains how it’s structured, the factors that influence its value, and tips on getting started. Our traders have also compared and listed the top GBP Index brokers:
British Pound Index Brokers UK
CMC Markets is a trustworthy brand authorized by tier-one regulators including the FCA and ASIC. Advanced trading tools, excellent market research and low fees help the broker stand out from rivals. The no minimum deposit, free demo account and social trading service have also made CMC Markets popular with aspiring traders.
Demo Account Regulated By MT4 Integration Yes FCA, ASIC, MAS, CIRO Yes Min. Deposit Min. Trade Leverage $0 0.01 Lots 1:30 (Retail), 1:500 (Pro)
FXTM is a top-rated forex and CFD broker. The company is secure and regulated by leading authorities, including the FCA and CySEC. Offering 1000+ markets and three account types, they cater to all levels of trader.
Demo Account Regulated By MT4 Integration Yes CySEC (Cyprus), FCA (UK), FSCA (South Africa), FSC (Mauritius) Yes Min. Deposit Min. Trade Leverage $10 0.01 Lots 1:30 (EU), 1:2000 (Global)
What Is The Pound Sterling Currency Index?
Through balancing a basket of comparable currencies, the British Pound Index offers a holistic view of the UK currency, less affected by single currency pair fluctuations.
The price of the British Pound is often affected in direct correlation to its key forex pairs – the US Dollar and Euro – through events such as trade deals and Brexit. However, by balancing the Pound against other currencies, such as the Japanese Yen and Australian Dollar, the index offers a universal view of the British Pound.
There are several versions of the British Pound Index (depending on the broker/provider), with varying compositions that make up their weighting.
One of the most accurate and widely followed Pound currency indices is the Bloomberg British Pound Index, which uses a trade-weighted system to determine the influence of each constituent forex pair.
|US Dollar (GBP/USD)||36.30%|
|Japanese Yen (GBP/JPY)||6.60%|
|Swiss Franc (GBP/CHF)||3.56%|
|Australian Dollar (GBP/AUD)||3.29%|
|Canadian Dollar (GBP/CAD)||3.10%|
|Chinese Yuan (GBP/CNH)||3.00%|
|Hong Kong Dollar (GBP/HKD)||2.80%|
|Russian Ruble (GBP/RUB)||2.26%|
Note that the Russian Ruble may be omitted from the weightings within some Pound Indices due to the current trade sanctions applied to the country.
To understand the journey of the British Pound Index so far, let’s look at the past and present of the British Pound in relation to other global currencies:
Until the advent of the First World War in 1914, the gold standard was used to back the Great British Pound. As a result, the UK had a highly resilient economy and currency, with over 40% of global investments held in GBP.
However, wartime policy and spending saw the gold standard abolished, with the post-war economy suffering greatly as a result. Attempts to reintroduce the gold standard were unsuccessful and in 1931 the Pound became a fiat currency.
Subsequent pegs, first to the US Dollar and then to the now defunct Deutsche Mark, were also unsuccessful. This meant that from 1992, the British Pound was freely traded against all other global currencies. As a result, there was now utility in an index tracking the GBP against other free-floating currencies.
Since 2007, the GBP Index has seen major fluctuations due to several factors such as global economic events, significant political actions and localised inflation.
One of the most significant economic events of the last two decades was the 2008 financial crash. This had a marked impact on the GBP Index, with the index value dropping over 25% between July and December of 2008.
Another significant event was Brexit, and by September 2016 the British Pound Index was down over 10% from April.
As of April 2023, the Pound Index is down over 37% since July 2008, having never recovered to pre-2008 crash levels.
GBP Currency Index Chart
What Influences The Value Of The British Pound Index?
While some of these factors are currency pair specific, due to the high weighting of the Euro and US Dollar in the Pound Index, they can have a significant impact on the overall index value.
Relationship With The EU
Europe and the UK have a long history of collaboration and opposition in trade, politics, tourism and warfare. Spearheaded by some of the UK’s geographically closest nations, the relationship with the European Union can have a significant impact on the value of Sterling.
The most recent example of this is when the UK voted to leave the EU in 2016, with the Pound Index losing over 10% of its value in the months after the referendum. Much of this loss was due to uncertainty and a view from the markets that this would negatively impact the UK economy.
The UK is a trade-heavy nation, with much of its food and energy products imported from regions such as Europe and Russia. As a result, international trade can have a significant impact on the price of the British Pound Currency Index.
Positive trade agreements that increase the access of UK businesses to foreign markets and enhance trade relationships can boost investor sentiment, leading to a potential strengthening of the GBP and an increase in the GBP Index.
On the other hand, the expiration or breakdown of trade agreements and the imposition of tariffs or political conflicts with major trade partners can weaken the Pound Index, either directly or indirectly.
A recent case of this is the change in relationship with Russia. Until 2021, Russia was a major exporter of energy products such as gas, oil and coal to the UK, with government figures placing the value of goods at £4.5 billion.
However, the banning of Russian gas in January 2023 and the move away from other energy products in 2022 led to a scarcity of energy and subsequent record inflation at the beginning of 2023. As a result of this inflation, the Pound Index has weakened since the conflict began, falling as much as 11% from February 2022 to February 2023.
UK Economic Health
The economic health of the UK can have a significant impact on the price of the British Pound Index.
Factors such as gross domestic product (GDP), employment rates and inflation can influence market sentiment and investor confidence in the strength of the UK economy.
Some of these statistics, such as inflation, are released periodically and can form the foundation of a repeatable trading strategy. Other indicators can be more ad-hoc, such as major companies moving in or out of the UK or political leaks.
To trade based on these events, investors must be ready to act on breaking news and be monitoring related feeds closely.
Global Economic Health
While the analysis of UK-specific economic events is valuable when speculating on the British Pound Index, many of the economies in the Western world are connected. This means that events such as banking crises or political tensions will often feature contagion that affects the Pound directly.
Even for events that do not affect the value of GBP holistically, the significant exposure of the Pound Index to the US Dollar (approx 36.3%) and Euro (approx 39.09%) means that changes in the value of these currencies will impact the price of the Pound Index.
Local Monetary Policy
Local monetary policy in the UK is set by the government and the Bank of England, with these entities in charge of different policies.
Changes in interest rates, changes to corporation tax and quantitative easing programs are examples of monetary policy measures that can impact the GBP Index.
As many of these decisions are government-led, the principles of the political party in power will often have a significant impact on monetary policy. As a result, the markets react strongly to political events such as elections and parliamentary votes.
Trading The Pound Index
There are several options for trading the Pound Index, though not as many as other popular currency indices like the US Dollar Index.
Futures are a popular market when currency trading, and our team found several GBP Index contracts offered by the CME Group. Options were also available, though British Pound Index symbols were hard to find – the CBOE offers the widest selection. Additionally, ETFs are on offer, with short, long and leveraged British Pound Index ETFs available through some brokers.
However, arguably the easiest way to trade the British Pound Index is via CFDs, like those offered by CMC Markets. Spreads start from 0.3 pips, the minimum order size is 0.01 lots, and shorting is allowed. 1:20 leverage is also available, amplifying returns (and losses) on price movements.
- Diversification – The GBP Index provides a more balanced trading product than a single forex pair. This allows investors to use an instrument to speculate on the value of the British Pound holistically. The Pound Index is also well diversified compared to other currency indices, such as the US Dollar Index.
- Volatility – The GBP Index has seen significant volatility in the past two decades. An uncertain global and local political landscape and the ongoing effects of Brexit may continue to provide trading opportunities.
- Range Of Products – The British Pound Currency Index can be traded as a CFD, ETF, option, or futures contract.
- No Standard Component Weighting – It is challenging to find the exact component currency weighting of many GBP Index products. This can make it difficult to predict how market events will affect the price of a specific currency index.
- High Euro and US Dollar Exposure – While the British Pound Index is more diversified than some other currency indices, it remains highly exposed to the US Dollar and Euro. Combined, these forex pairs make up just over 75% of the Bloomberg British Pound Index, and other GBP indices are likely to have similar statistics.
Each investor’s strategy should be based on their view of the market. However, below are some examples of potential strategies for trading the British Pound Index.
Fundamental analysis looks at the long-term prospects of an asset. Suitable for futures or ETFs, fundamental trading rides over short-term volatility towards a long-term price target.
An example of a fundamental-based trade in the British Pound Index could be an investor taking a position in a short British Pound ETF as they believe that financial firms will continue to move out of London following Brexit.
The financial sector makes up a significant chunk of the UK’s export economy, and major changes to its strength could impact the value of the British Pound Index.
Another way of looking for trading opportunities on the British Pound Index is technical analysis. This strategy involves turning to a British Pound graph and using chart patterns, indicators, overlays and statistics to predict future movements.
An example of a technical analysis strategy is using an indicator such as the Fibonacci Overlay to find medium-term support and resistance levels in the GBP Index. A trader could then open a position when the Index price hit one of these levels, speculating that the value would return to within the indicator’s suggested price range.
Events & News
For currency products such as the British Pound Index, economic news and fiscal announcements can have an impact on value.
Statistics such as GDP, inflation, political decisions, interest rates and global trade are all examples of events and news that could impact the price of the Pound Index.
For investors or firms with significant exposure to the value of the GBP, the British Pound Index can offer a hedge against potential adverse movements in the exchange rate.
For example, if a business in the UK exports goods to the United States and expects to receive payments in USD, they could take a short British Pound Index ETF or options position to hedge against potential losses.
Depending on the type of instrument, the trading hours for a British Pound Index product can differ significantly. While futures contracts can trade up to 23 hours per day, five days a week, ETFs will be subject to local exchange trading hours, which can be as few as 8.5 hours per day.
Alternatively, the GBP currency index CFD from CMC Markets is available from 00:00 to 22:00 Monday to Friday.
Bottom Line On The British Pound Index
The British Pound Currency Index offers a vehicle for speculation and hedging on the international value of the Pound Sterling. The GBP Index is less exposed to a single currency than other indices like the US Dollar Index and has plenty of active price determinants. On the other hand, products are more scarce than other major currency indices or forex pairs.
Is The British Pound Index Affected By Inflation?
Inflation is one of the biggest factors when looking at the value of a currency. For the British Pound Index, any significant deviations in inflation against its major component currencies of the US Dollar and Euro can have a significant impact on the Index value.
Can I Bet Against GBP?
The GBP Currency Index can be used to hedge or bet against GBP. A British Pound Index product that can be used to do this is a short British Pound Index ETF, while investors can also make high-leverage bets against GBP with CFDs.
Is The British Pound Index A Trade Weighted Index?
While different British Pound Index products have their own weighting criteria, one of the most respected benchmark indices (the Bloomberg British Pound Index) uses a trade weighting that adjusts yearly.