Вы находитесь на странице: 1из 17

Page |1


Prepared By: Prepared For:

Waris Hussain ISMAR Financials

Page |2


Page |3


United Kingdom is located in Europe, its capital is London and it is the worlds largest financial hub. UK has 4 countries in it England, Scotland, Ireland and Wales. Official language of UK is English and it follows a constitutional monarch system. Its currency is Pound Sterling. UK is a service base economy and also it was the first industrialize nation and remain a industrialize nation till 19th century. Area of UK is 243,789 square kilometers and its population is around 63 million. Current UK economy can be seen in chart below. CURRENT PERIOD LAST PERIOD HIGHEST INDICATORS GDP (%) Inflation (%) Interest Rate (%) Unemployment (%) Trade Balance Balance of Payment Industrial Prod. (%) Foreign reserves Govt. Budget (%) Business confidence 0.9 2.7 0.5 7.8 -3466 GBP m -12834 GBP m -2.4 103971 USD m -7.8 4.2 -0.4 2.7 0.5 7.8 -3644 GBP m -20767 GBP m -3 104210 USD m -10.2 1.1 5.3 (1973) 8.5 (1991) 17 (1979) 12 (1984) 2946 (1981) 2752 (1981) 22.60 (1973) 104210 (2012) 3.6 (2000) 25.8 (2010) LOWEST -2.50 (1958) 0.5 (2000) 0.5 (2009) 3.4 (1973) -6067 (2005) -20767 (2012) -11.90 (1980) 35190 (2000) -11.5 (2009) -45.3 (2009)

Events that affect the economy of UK badly were 1919 Depression, Great Depression of 1930, 1973 Recession, Early 1980s Recession, Early 1990s Recession, 2008 Recession, and Early 2010 Recession. UK currency is Pound sterling and its symbol is . In FOREX market it is denoted by GBP and its subunit is penny. UK is ranked 5 in the top traded currency and it covers 12.9% market. Five factors that tend to affect UK currency most include monetary policy, price inflation, confidence and sentiment, economic growth (GDP) and the balance of payments. Current GBP/USD rate is 1.6125 and it is in bullish trend from past 7 months. Last 52 week low that can be seen was 1.5236 and last 52 week high was 1.6379. The average movement of GBP/USD market is approximately 150 pips. The 5 main economic events that move GBP/USD are FOMC Rate decision, BOE rate decision, US Unemployment news, BOE meetings, GDP.

Page |4


United Kingdom (UK) is an independent state located in Europe which came into being on 1st Jan 1801. United Kingdom basically includes four countries: England Scotland Wales Northern Ireland United Kingdom Government follows a constitutional monarchy system mixed with parliamentary system. Capital of UK is London. It is a developed country and it is the world sixth largest economy. UK economy is basically a service based economy and it has a literacy rate of around 99%. Also, it was the first industrialized country and worlds renowned power of 19th and 20th century. The UK is still referred to as a great power and retains considerable economic, cultural, military, scientific and political influence internationally and It is also a recognized nuclear weapons state and its military expenditure ranks fourth in the world. United Kingdom is a permanent member of: UNITED NATION SECURITY COUNCIL, EUROPEAN UNION, Common wealth of Nations NATO Organization for Economic Co-operation and Development (OECD) World Trade organization

History of United Kingdom

As per the Act of Union 1707, two countries England and Scotland were united and have given a name of Great Britain. But in 1801 Great Britain and Kingdom of Ireland united under the Act of Union 1800 and has been given a name of United Kingdom. Thats why UK originally came into being in 1801. Although UK is sovereign and independent country but England, Ireland, Wales and Scotland are countries with in the country and have their own developed self-government. This is the result of several centuries of historic events including the invasions of ruling Normans in Ireland, the Irish Rebellion of 1641, and War of American Independence. The union eliminated the separate Parliaments of Great Britain and Ireland creating an integrated Parliament of the United Kingdom. Ireland sent roughly 100 MPs to the House of Commons and 28 peers to the House of Lords. During the 19th and early 20th century, the rise of Irish Nationalism emerged particularly in the Catholic population. Movement for the cancellation of the Act of Union is known as Home Rule and many campaigns have failed including the one in 1912 that passed the House of Commons

Page |5

but was voted out in the House of Lords. In 1916, an one-sidedly declared Irish Republic was announced in Dublin and resulted to the Anglo-Irish War that lasts until 1921. The Anglo-Irish Treaty of 1921 formed the Irish Free State and left the British Commonwealth without constitutional ties with UK and 6 northern Irish counties remained part of the United Kingdom. The Royal and Parliamentary Titles Act 1927 renamed the United Kingdom of Great Britain and Ireland to United Kingdom of Great Britain and Northern Ireland.


Basic Facts
Origin Capital Official Language Government Monarch Prime Minister Currency Major languages: Natural Resources: Europe London English Queen Elizabeth David Cameroon Pound Sterling (GBP) English, Welsh, Irish Gaelic, Scottish Gaelic. coal, petroleum, natural gas, tin, limestone, iron ore, salt, clay, chalk, gypsum, lead, silica, arable land It is a recognized nuclear weapons state and its military expenditure ranks fourth in the world.

Defense system and military

Geography and Population

The total area of the United Kingdom is approximately 243,789 square kilometers and the population of United Kingdom is about 63 million. As of 1993 10% of the UK was forested, 46% used for pastures and 25% used for agriculture. Population wise it is the third largest in the European Union and the 22nd-largest in the world.

Name England Scotland Wales Northern Ireland

Area (sq. km) 130395 78772 20779 13843

Population (approx) (m) 53 (84%) 5 (8.5%) 3 (5%) 2 (3%)

Page |6

Between 2001 and 2011 the population increased by an average annual rate of approximately 0.7% as compares to 0.3% per year in the period 1991 to 2001.The 2011 census also confirmed that the proportion of the population aged 65 and over has more than trebled (from 5 to 16%). England's population in 2011 was found to be 53 million; it is one of the most densely populated countries in the world. In percentage terms England has had the fastest growing population of any country of the UK in the period from 2001 to 2011, with an increase of 7.9%.


As per the measure of nominal GDP UK economy is 6th largest economy in the world and third largest in the Europe. The British economy consist of 4 major economy England, Scotland, Wales and Northern Ireland. UK was the first the country who has given the concept of Industrialize development by industrializing themselves. UK plays a major role in the area of financial industry in the world, thats why UK is also known as knowledge or service based economy. London is the world largest financial centre and plays an important role in the country economy. In terms of Foreign Direct Investment UK is ranked 3 rd. The currency of the UK is the pound sterling, which is also the world's third-largest reserve currency after the U.S. dollar and the euro. Its GDP as per 2011 data is $2.480 trillion. UK GDP growth was 0.9% in 3rd quarter of 2012. Its inflation rate is 2.7% and unemployment rate is 7.8%. Its trade deficit is of $5.6 billion. Its major export is to Germany 11.6%, US 10.6%, Netherlands 8.4%, France 7.8%, Ireland 6.4%, Belgium 5.7%.UK budget deficit is $25.4 billion.UK has a foreign reserves of about $104.8 billion. UK external debt is about $ 2115.21billion. Main sectors of UK economy is Agriculture, hunting, fishing and forestry sector Construction sector Production industries (electricity, gas , mining etc) Service industry (creative, hotel, financial, tourism and education services etc)

Page |7

The service sector is the dominant sector of the UK economy, and contributes around 73% of GDP. London is one of the world's largest financial centre and Edinburgh is also one of the largest financial centre in Europe. Tourism is very important to the British economy and is ranked as the sixth major tourist destination in the world. The automotive industry is a significant part of the UK manufacturing sector and employs over 800,000 people, with a turnover of some 52 billion, generating 26.6 billion of exports. Agriculture is intensive, highly mechanized, and efficient by European standards, producing about 60% of food needs. Construction Industry is the fastest growing sector of the economy after the 2010 Recession.

Major economic indicators and their past trend Economic Indicator

GDP (%) Interest Rate Unemployment Rate CPI PPI Balance of trade (total) Goods Services Budget deficit Retail sales Industrial production Debt Foreign exchange reserves

Current statistics
0.9% (3rd quarter of 2012) 0.5% 7.8% 2.7%(124.4 index) -0.3% $(5.6) billion $(14.83) billion $9.19 billion $189.4 billion 0.9% (2.4) % $ 2115.21billion. $104.8 billion

1. GDP Growth Rate

The GDP of United Kingdom increased to 0.9% in 3rd quarter of 2012. The average GDP of UK from 1955 to 2012 is 0.62% and highest GDP recorded was 5.30% in 1973 and a lowest GDP recorded was -2.5% in 1958. Service sector account for 75% of GDP, industrial sector accounts for 21.5% of GDP.

Page |8

2. Interest Rate

The interest rate prevailing in the United Kingdom is 0.5% and it is the responsibility of Bank of England to set the interest rate of UK. The prevailing interest rate is consistent from March 2009. From 1971 till now interest rate averages 8.25%, all time high interest rate was 17% in 1979 and current interest rate is the lowest. 3. Unemployment Rate

Current unemployment rate in UK is 7.80%. UK all time (1971-2012) average unemployment rate is 7.3%, whereas highest and lowest Unemployment rate are 12.0% (1984) and 3.4% (1973) respectively. 4. Inflation Rate

Page |9

Consumer price index Inflation rate as per November 2012 data is 2.70%. The Retail Prices Index annual inflation stands at 3.0% in November 2012, down from 3.2% in October. Historically, from 1989 until 2012, the United Kingdom Inflation Rate averaged 2.8% reaching an all time high of 8.5% in April 1991 and a record low of 0.5% in May 2000.

5. Trade Balance

The trade deficit of UK is about $5.6 billion; the split off of this data is that UK has a trade surplus of $9.19 billion in service sector where as trade deficit of $14.83 billion in industrial production sector. Historically, from 1955 until 2012, the United Kingdom Balance of Trade averaged -1195.09 GBP Million reaching an all time high of 2946 GBP Million in March of 1981 and a record low of -6067 GBP Million in August of 2005. Since 1998, U.K. runs consistent trade deficit mainly due to increase in demand of consumer goods, decline in manufacturing and deterioration in oil and gas production. Major export partners of UK are Germany 11.6%, US 10.6%, Netherlands 8.4%, France 7.8%, Ireland 6.4%, Belgium 5.7% and major import partners are Germany 13.2%, China 8.7%, Netherlands 7.5%, US 6.1%, France 6%, Norway 5%, Belgium 5%.

6. Industrial Production

P a g e | 10

Industrial Production in the United Kingdom decreased 2.40 percent in November of 2012 over the same month in the previous year. In the United Kingdom, industrial production measures the output of businesses integrated in industrial sector of the economy such as manufacturing, mining and utilities. All time high increase in industrial production is of 22.60% in 1973 and a record decrease in industrial production is -11.90% in 1980.


EVENT AND YEAR Post-Napoleonic depression (1812) DURATION CAUSES The post-Napoleonic depression refers to a post-war economic depression experienced by European countries following the end of the Napoleonic wars. Its a post war readjustment. The Panic of 1857 was a financial panic in the United States caused by the declining international economy and over-expansion of the domestic economy. In fact it was first global economic crisis. Impact on exports resulting from American recession post-civil war. The Panic of 1873 has been described as "the first truly international crisis". Whole world was hit but UK was worst hit. End of World War 1 AFFECTS

9 years

Panic of 1857

1 year

Brief contraction of economy of approximately 3.5%.

1867-9 recession Long Depression 1873

2 years

1.9% fall in GDP Agricultural deflation hit farmers and their workers, although industrial output continued to grow. GDP reduced by 11% in 1919, 6% in 1920 and 8.1% in 1921. Deflation -10% in 1921 and -14% in 1922. Reducing demand for UK exports, also high interest rate defending the gold standard. 3-5% deflation pa. UK much less affected than US. Took 16 quarters for GDP to recover to that at start of recession. Took 14 quarters for GDP to recover to that at start of recession. GDP reduced by 3.9% and 3.4%. GDP Reduced by 5.9% and 5.8%. Company earnings decline 35%. Unemployment rises to high extent.

20 years

1919 Depression

3 years

Great Depression 1930

2 years

The Great Depression was a severe worldwide economic depression in the decade preceding World War II.

1973 Recession

2 years

1973 oil crisis.

Early 1980s Recession

2 years

Cause possibly because of monetarist government policies to reduce inflation

P a g e | 11

Early 1990s Recession

2 years

US savings and loan crisis.

2008 Recession

1.5 years

World financial crisis

GDP reduce by 2.5%.Company earnings decline 25%. Peak budget deficit -8% of GDP. Unemployment rises 55% from 6.9% of the working population in 1990 to 10.7% in 1993. Manufacturing output down 7% by end 2008. It was the deepest recession since the war. It has affected many sectors including banks and investment firms, and seen many well known and established businesses fold. The unemployment rate rose to 8.1%. Double-dip Recession.

Early 2010 Recession

1 year

Fiscal retrenchment, European sovereign debt crisis.


As per the Price-water house Coopers (pwc) report: The outlook for growth and employment is gradually improving across the UK as a whole. The Euro zone outlook remains much stormier, which creates downside risks around growth which businesses should make contingency plans for. The UK economy has been on a bit of a roller coaster ride over the last few years, but the message from our latest Economic Outlook report is that the latest dip seems to be bottoming out. We are now more optimistic that we will get some growth next year, perhaps just under 2% compared to about zero this year. And that is because GDP growth picked up in the third quarter, retail sales are up, employment is up, and unemployment is down. So there has been some better news in recent weeks and months that give us a bit more cautious optimism about the future. At the same time, there are plenty of risks out there the euro zone crisis continues and businesses would be prudent to make contingency plans for less favorable outcomes in the euro zone. The UK economy has been on a bit of a roller coaster ride over the last few years, but the message from our latest Economic Outlook report is that the latest dip seems to be bottoming out. We are now more optimistic that we will get some growth next year, perhaps just under 2% compared to about zero this year. And that is because GDP growth picked up in the third quarter, retail sales are up, employment is up, and unemployment is down. So there has been some better news in recent weeks and months that give us a bit more cautious optimism about the future. At the same time, there are plenty of risks out there the euro zone crisis continues

P a g e | 12

and businesses would be prudent to make contingency plans for less favorable outcomes in the euro zone. For the Bank of England, the message is that as the economy recovers they need to signal a clear strategy on interest rates so businesses can plan accordingly. Key projection for UK economy is that its Real GDP growth will be 1.8% for 2013, Inflation will be 2.3% in 2013 which wash 2.7% in 2012 and consumer spending growth will increase by 1.3%.


The pound sterling (GBP) is the official currency of the United Kingdom and London is the world capital for foreign exchange trading. Volume traded in London foreign exchange is in trillions. The Bank of England is the central bank which is responsible for issuing pound sterling and taking decisions regarding the currency. Sterling is also the third most held reserve currency in global reserves. GBP is the fourth most traded currency in market. BASIC INFORMATION OF UK CURRENCY Currency Name Pound Sterling Currency Symbol Subunit Penny Denominations Coins 1p, 2p,5p, 10p, 20p, 50p, 1 and 2 pound Banknotes 5,10,20 and 50 pounds Official users 9 British Territories

5 MOST TRADED CURRENCY United States European Union Japan United Kingdom Australia
USD ($) EUR () JPY () GBP () AUD ($) 84.9% 39.1% 19.0% 12.9% 7.6%

There are about 9 British territories that are official user of GBP named British Antarctic Territory , Falkland Islands, Gibraltar, Guernsey, Isle of Man, Jersey, Saint Helena, Ascension and Tristan da Cunha, South Georgia and the South Sandwich Islands, British Indian Ocean Territory. British pound is one of the most important currencies in the world. The facts that it is the oldest currency currently being used and also a highly valued currency among the major currencies of the world help it earn a fourth place in the list of most traded currency. One of the reasons for the heavy trade in the currency is the location of the largest foreign exchange trading hub i.e. London in the area where pound sterling is used as a currency. The currency uses a floating rate regime and can be easily traded in the foreign exchange markets. The contraction of the British economy has led to a highly volatile monetary system and that is why the value of the currency fluctuates frequently in comparison with the United States dollar and Deutsche Mark. This attracts the attention of the investors resulting in more of investment and more of hedging in the currency.

P a g e | 13

The pound sterling of the United Kingdom was originally the value of one Troy pound of sterling silver, hence the name: Pound Sterling. The Pound Sterling was adopted as the Royal Chartered Bank of England's currency in 1694. England's national debt increased exponentially, from 1700 to the mid 1790's, thus making it extremely difficult to exchange banknotes for gold. The subsequent strain on the nation's financial system led to what was known as the Restriction Period when in order for the bank to play catch up with its' finances, it issued banknotes of one and two pounds in place of the actual coinage. In further efforts to increase the stability of the pound, the Bank Charter Act of 1844 introduced the Bank of England as the only bank in the United Kingdom allowed issuing banknotes as a legal currency. This meant that all other banks in England and Wales were legally obliged to obtain their banknotes from the Bank of England. In Scotland, however, The Banknote (Scotland) Act of 1845 allowed Scottish banks to continue to issue their own Pound Sterling banknotes. Having learned from the effects that inflation had on the financial market from the Restriction Period the Bank of England began to control the production of banknotes. This ensured that banknotes were only produced when there were gold reserves to back them. The Bank of England became a major lender to other commercial banks. As it was difficult to keep backing banknotes with gold standard while still lending to other banks the Bank of England had to set interest rates high to maintain the gold standard supply. Shortly before the First World War, the treasury issued the small and simple cipher watermarked stamp paper 10/- and 1 banknotes. The Bank of England tried to return to gold standard after the war, but gold standard could no longer continue to work in the growing financial market. From 1932 to the present day, the only limitation on issuing bank notes is that of the UK Parliament's approval.


Due to Pound Sterling popularity and familiarity among traders, many people that begin to trade forex often choose the GBP as one of the currencies they trade. For traders that trade on fundamentals, knowing which reports to follow that affect the GBP is very important. Specifically, five factors that tend to affect all currencies the greatest include monetary policy, price inflation, confidence and sentiment, economic growth (GDP) and the balance of payments. Using these five general factors as a template, you can then determine which reports are most important to form a comprehensive view of the direction of a currency. 1. Prices and Inflation The first important factor, price and inflation, plays a crucial role in the value of the GBP. In general, countries with high levels of inflation relative to other countries see their currency value depreciate more compared to those other currencies. In addition, inflation also usually causes the central bank to take action, such as adjusting interest rates to control these unwanted effects.

P a g e | 14

To gauge levels of inflation in the U.K., traders will typically follow the Consumer Price Index (CPI), compiled and released by the Office for National Statistics. The CPI calculates the change in prices of goods and services purchased by consumers in a given period. This report is important because it is the measure that the Bank of England (BOE) uses for its inflation target. Any changes in the CPI that deviate from the BOE's inflation target could imply future monetary policy action that could significantly affect the GBP. In addition, although consumer prices tend to affect the majority of changes in the level of inflation, other measures such as the Producer's Price Index (PPI) are also useful. The PPI report is also released earlier than the CPI, so both should be viewed together for a more complete picture. 2. Monetary Policy The report that mostly trader follow are interest rate report and Bank of England inflation report. Whenever the BOE feels that inflation is getting to a level that threatens the stability of the pound, the bank will use monetary policy tools at its disposable to control inflation. It is the timing of these monetary policies, such as interest rates changes that traders want to predict. To keep track of monetary policy, traders will follow the changes in the bank rate, which is the interest rate banks charge other banks on balances held at the BOE. 3. Confidence and Sentiment Surveys that gauge market sentiment are another important tool for fundamental traders. Confidence and Sentiment reports for the U.K. are important because traders want to know whether the majority of people are optimistic about the economy or pessimistic. The changes and the size of the change can be keys to detecting shifting trends in the underlying economy, and consequently changes in the GBP. To track sentiment in the U.K., many traders will follow the Gfk Consumer Confidence and the Nationwide Consumer Confidence Index (NCCI) reports. Both reports are surveys based on five questions that relate to the general economic environment, employment and expectations for the future. 4. GDP/Economic Growth Reports that mostly trader focus on are Manufacturing PMI, Services PMI, Retail Sales, GDP. The primary measure of economic activity in the U.K., as in many other countries, is the gross domestic product (GDP). In addition, because the GDP is a quarterly report, many traders will supplement that report with more frequent indicators of economic activity such as retail sales, manufacturing PMI and services PMI. As consumers are generally considered by many as the drivers of economic activity, retail sales are usually given a larger weighting of importance. 5. Balance of Payments Lastly, the balance of payments for a country is an accounting record of its interaction with the rest of the world. The Balance of payment is made up of three accounts, but generally only the current account is of interest to forex traders. The current account shows how much a country is exporting and importing, and the flow of income payments and transfer payments. In

P a g e | 15

general, a current account surplus is positive for the currency as it shows more capital is flowing into the currency than leaving, and a deficit is negative for the opposite reasons. Also, it should be noted that the trade balance report is released monthly, while the current account is released quarterly. For import export data only the trade balance report should be use.


Mostly Pound sterling is traded against US dollars. The most recent Bank for International Settlements (BIS) survey shows that the GBP/USD with 14% of total daily volume is the third most traded major currency pair. The GBP/USD is one of the most volatile currency pairs. Trading the GBP/USD currency pair is also known as trading the "Cable". THE GBP/USD rate is composed of the British Pound "base currency" and the US Dollar "quote currency". The value of the GBP/USD pair is quoted as 1 British pound per X U.S. dollars. The GBP/USD tends to have a negative correlation with the USD/CHF and a positive correlation to the EURO/USD currency pairs. This is due to the positive correlation of the euro, Swiss franc and the British pound. The current rate, as on 13th Jan 2012, of GBP/USD is 1.6125. From June 2012 GBP/USD market is moving in bullish trend. As per 2011 to 2012 data the highest high it has made was 1.6745 in April 2011 and the lowest low it has made was 1.5233 on January 2012. Last 52 week low that can be seen was 1.5236 and last 52 week high was 1.6379. Average broker spread in GBP/USD is 4 to 5 pips. The average daily movement of USD/GBP is around 150 pips. GBP/USD most active trading session are London and New York session. The 5 main economic events that moves GBP/USD are FOMC Rate Decision + Press Conference BOE Rate Decision + Press Conference US Employment (Non Farm Payrolls) Bank of England Meeting Minutes Gross Domestic Product (GDP)

P a g e | 16

The GBP/USD movement of year 2012 can be seen in graph.

Future outlook of GBP

The third-quarter growth surprise has given the pound a firm platform going to the year end. While there is the threat of more QE, this is usually only a short-term driver for sterling and the monetary loosening signals from the U.S. Fed and the ECB are more emphatic than those from the BoE. David Tinsley at BNP Paribas says a cloud of uncertainty currently hangs over asset and currency markets in the run-up to Christmas, which is favoring the dollar. As various euro zone and U.S. uncertainties are ironed out, this should favor sterling. 'We also expect UK growth news to be better than the euro zones and on a par with the U.S.,' added Mr. Tinsley. Philip Shaw at Investec emphasized that sterling's exchange rates are a bit part in the euro-dollar story. With a pessimistic outlook on the euro zone, he expects sterling to make gains against the euro in the coming months to about 1.30 but to fall against a strong dollar to about $1.53. 'An end to uncertainty on how the U.S. is going to address the fiscal cliff will favor the dollar, particularly in the case of a Republican victory,' he said, 'Meanwhile, euro zone pressure points will flare up again in the New Year.' In the long-term, many economists believe the days of 1.50 to the pound are gone and that even 1.40 is unrealistic.

P a g e | 17

They argue that the economic fundamentals have changed so that 'fair value' between the euro and pound is somewhere around 1.30 and $1.60 - maybe slightly higher in each case. If the pound appreciates significantly above these rates, it will harm the UK economy and be unsustainable in the long and even medium term. The euro zone crisis, however, is making it increasingly difficult to estimate what fair value is between the euro and other currencies, and has a distorting effect on the pound-dollar rates also.