Sterling

Sterling, commonly known as the British pound (GBP), is the official currency of the United Kingdom and its territories.
Written by
Reviewed by
Updated on Jun 6, 2024
Reading time 5 minutes

3 key takeaways

Copy link to section
  • Sterling is the world’s oldest continuously used currency, dating back to Anglo-Saxon times.
  • It is a major global reserve currency and widely traded in foreign exchange markets.
  • The value of sterling is influenced by the UK’s economic performance, political stability, and international trade relations.

What is sterling?

Copy link to section

Sterling, or the British pound, is the official currency of the United Kingdom, including England, Scotland, Wales, and Northern Ireland, as well as several British territories. The currency symbol for sterling is £, and its ISO code is GBP. Sterling is one of the oldest currencies still in use today, with origins tracing back over a thousand years.

History of sterling

Copy link to section

Sterling has a long and storied history. It originated in the 8th century during the reign of King Offa of Mercia, who introduced a standardized silver penny, which became the basis of the currency. The pound sterling (from the Latin “libra”) originally represented one pound of silver.

Over the centuries, the currency evolved, with significant milestones including the establishment of the Bank of England in 1694 and the adoption of the gold standard in the 19th century.

Today, sterling is a fiat currency, meaning its value is not based on physical commodities but rather on the economic stability and governance of the UK.

Sterling balances

Copy link to section

Sterling balances refer to the holdings of pounds by foreign governments and institutions. Historically, these balances accumulated due to trade surpluses with the UK, as many countries preferred to hold their reserves in sterling.

This was particularly true for countries within the sterling area. Managing these balances was a crucial aspect of the UK’s economic policy, as large outflows or inflows of sterling could impact the country’s foreign exchange reserves and economic stability.

Sterling M3

Copy link to section

Sterling M3 is a measure of the UK money supply that includes cash in circulation, bank deposits, and other liquid assets. It is a broad indicator of the amount of money available in the economy and is closely monitored by economists and policymakers.

Changes in the M3 money supply can signal shifts in economic activity, inflationary pressures, and the overall health of the financial system. An increase in Sterling M3 typically indicates more liquidity in the economy, which can spur growth but also lead to inflation if not managed carefully.

Importance of sterling

Copy link to section

Sterling holds significant importance in the global economy for several reasons:

  • Reserve currency: The British pound is one of the world’s major reserve currencies, held by central banks and financial institutions as part of their foreign exchange reserves.
  • Foreign exchange: Sterling is one of the most traded currencies in the foreign exchange market, known for its liquidity and stability. It plays a crucial role in global financial transactions and investment flows.
  • Economic indicator: The value of sterling serves as an indicator of the UK’s economic health, reflecting investor confidence in the country’s economic policies, political stability, and international trade relationships.

The sterling area and its significance

Copy link to section

The sterling area refers to a group of countries that pegged their currencies to the British pound and held their reserves in sterling. This arrangement was established in the early 20th century and persisted until the 1970s. It facilitated easier trade and financial transactions within the British Empire and Commonwealth, providing stability and liquidity.

The sterling area helped maintain the pound’s status as a major global currency and supported the UK’s international trade network.

Factors influencing the value of sterling

Copy link to section

The value of sterling is affected by various factors, including:

  • Economic performance: Indicators such as GDP growth, employment rates, inflation, and interest rates can influence the strength of sterling. Strong economic performance typically boosts confidence in the currency.
  • Political stability: Political events, government policies, and geopolitical developments can impact the value of sterling. Political uncertainty or instability can lead to fluctuations in the currency’s value.
  • Trade balance: The UK’s trade balance, including exports and imports, affects the demand for sterling. A positive trade balance (more exports than imports) generally supports a stronger currency.
  • Market sentiment: Investor perceptions and market sentiment play a crucial role in determining the value of sterling. Changes in risk appetite, global economic trends, and speculative activities can lead to short-term fluctuations.

Examples of sterling in action

Copy link to section

Sterling’s value can be observed in its exchange rate with other major currencies, such as the US dollar (GBP/USD) and the euro (GBP/EUR). For instance, during the Brexit referendum in 2016, the value of sterling experienced significant volatility due to uncertainty about the UK’s future economic and political landscape.

The currency depreciated sharply against other major currencies, reflecting market concerns over the potential impact of Brexit on the UK’s economy.

Sterling, or the British pound, is a cornerstone of the global financial system with a rich history and significant influence in international markets. Its value is shaped by a combination of economic indicators, political events, and market sentiment, making it a key indicator of the UK’s economic health and stability.

Understanding the factors that influence sterling, including its historical context within the sterling area, the management of sterling balances, and measures like Sterling M3, provides valuable insights into broader economic trends and investment opportunities.


Sources & references

Arti

Arti

AI Financial Assistant

  • Finance
  • Investing
  • Trading
  • Stock Market
  • Cryptocurrency
Arti is a specialized AI Financial Assistant at Invezz, created to support the editorial team. He leverages both AI and the Invezz.com knowledge base, understands over 100,000 Invezz related data points, has read every piece of research, news and guidance we\'ve ever produced, and is trained to never make up new...