Buy the British Pound

It seems to be time to buy the British pound as the Bank of England contemplates raising interest rates. This is because the economic recovery is moving along in Britain. As noted in, the British pound is trading at five year highs against the dollar.

The pound was trading close to its highest level in almost five years against the dollar on Wednesday, amid heightened expectations for a U.K. interest rate hike in the early part of next year.

GBP/USD pair is trading near 1.70. This is the best that the pound sterling has done against the greenback since the early fall of 2009. Traders are looking at a support to resistance range of 1.69 to 1.70. This good news for the GBP comes after a promising purchasing manager index as evidence of a continuing recovery.

Further Evidence of British Recovery

According to Reuters, the British purchasing manager’s index is up and surging output boosts manufacturing numbers:

Surging output and an influx of orders helped British manufacturing activity grow last month at a much faster rate than expected, a survey showed on Thursday, boding well for Britain’s swift economic recovery.

The Markit/CIPS UK Manufacturing Purchasing Managers’ Index (PMI) rose in April to 57.3, its highest reading since November, compared a March reading of 55.8 that was revised up from 55.3.

As we have often noted on these pages, a major factor in the value of a currency is the strength of the nation’s economy. As increased factory orders lead to higher production the GBP is likely to go up as well. The intermediate factor here is that the Bank of England is likely to raise interest rates within a year which has a direct bearing on the value of the British pound versus other currencies.

Trading the GBP

If you are going to buy the British pound you need to buy it with something. The handiest currency to use in this regard is the US dollar, the USD. However, if you want to make a profit you need to think of a currency that is likely to suffer in the coming year and buy the British pound with that. The XE web site is a good source of information about British pound rates:

The British Pound is the currency of United Kingdom. Our currency rankings show that the most popular United Kingdom Pound exchange rate is the EUR to GBP rate. The currency code for Pounds is GBP, and the currency symbol is £.

Although the most popular quoted rate may be the EUR/EURO that may not be the most profitable pair to trade as the Euro zone as a whole is getting better as well and one can expect the Euro to do reasonably well in the coming year. About a year ago we wrote about trading BRICS currencies. The BRICS nations are Brazil, Russia, India, China and South Africa. These nations were leading the charge out of a global recession but their economies have cooled off. Russia is especially having problems after annexing part of a neighboring country and China has still not convinced folks that its real estate bubble will not rapidly burst. Any of these currencies may be a better bet for profits than the USD or EUR if you want to buy GBP. That assumes, of course that you plow your profits back into one of these currencies and that their economies subsequently recover. As always do your own homework and sit out any trades that you do not fully understand.