Introduction

• The pound sterling, or British pound, is the official currency of the United Kingdom, its Crown Dependencies (the Isle of Man and the Channel Islands) and the British Overseas Territories of South Georgia and the South Sandwich Islands, British Antarctic Territory and Tristan da Cunha. It is subdivided into 100 pence.
• Sterling is the fourth most traded currency in the foreign exchange market, after the US dollar, the euro and the Japanese yen. According to the BIS Survey 2010, transactions in the Pound Sterling account for close to 13% of the average daily turnover in the forex market.
• Together with the US Dollar, the Euro and the Yen, it forms the basket of currencies which calculate the value of IMF Special Drawing Rights, with a 11.3% weighting (the 3rd greatest) as of 2011. Sterling is also the third most held reserve currency in global reserves.

Influences on the Pound Sterling

• Since 1992 the pound has floated free although the Government has tried, and succeeded, in maintaining an inflation rate broadly in line with Europe.
• Like all freely floating currencies, the British pound is influenced by interest rates. The Bank of England aims to maintain target inflation rates by setting the interest rate. Movements in the interest rate have a direct impact on the currency.
• In addition, the exchange rate appreciates with greater economic health as well as improved balance of payments.
• The pound and euro fluctuate in value against one another, although there may be correlation between movements in their respective exchange rates with other currencies, most commonly the US dollar.
• Inflation concerns in the UK led the Bank of England to raise interest rates in late 2006 and 2007. This caused the pound to appreciate against other major currencies, and with the US dollar depreciating at the same time, the pound hit a 15-year high against the US dollar on 18 April 2007, having reached US$2 for the first time since 1992 the day before. The pound and many other currencies continued to appreciate against the dollar, and sterling hit a 26-year high of US$2.1161 on 7 November 2007 as the dollar fell worldwide. From mid-2003 to mid 2007, the pound/euro rate remained range bound (within ± 5%) of €1.45.
• Following the global financial crisis in late 2008, the pound has since depreciated at one of the fastest rates in history, reaching a 24-year low of $1.35 per £1 on 23 January 2009 and falling below €1.25 against the euro in April 2008. A further decline was seen during the remainder of 2008; most dramatically in December when its euro rate hit an all-time low at €1.0219 (29th). The pound appreciated in early 2009 reaching a peak in mid-July of €1.17. The following months saw a steady decline, with the pound's current (July 2011) value at €1.11 and US$1.61.