Who are the Market Participants within the Foreign Exchange Industry?
This group is made up of many of the UK's largest companies. Within this group, you can find a wide range of companies involved in exporting goods and services from the UK to the rest of the world. The volume of UK exports gives an excellent indication of the amount of foreign exchange transacted by the sub-sets of this group, with companies in the machinery and transport sector taking centre stage. Generally, exporters have a positive impact on the value of the British Pound.
This group of individuals and companies use the foreign exchange market to buy foreign currency to pay for goods and services they have purchased in other countries. Generally, importers have a negative impact on the value of the British Pound.
British Fund Managers
Over the past two decades, the fund management industry has flourished in the United Kingdom, underpinned by a regulatory environment that encourages international investment. This group’s net effect on the Pound Sterling depends on their investment decisions, but when the UK fund management industry places their investments abroad, that is generally a negative for Sterling. Nevertheless, such foreign investments can be hedged, which often results in British fund managers participating in the forex market by transacting forward contracts and currency options.
Foreign Fund Managers
This group's influence on the Pound Sterling changes depending on their level of interest in UK asset markets. During times when UK stocks and bonds are attractive, the UK receives substantial allocations of foreign capital, which increases the value of the British Pound. Nevertheless, when they wish to hedge existing UK investments, it can generate selling flows in Sterling.
In the UK, the Bank of England generally allows the market to determine the value of the British Pound, although a few exceptions to this policy exist. First of all, the Bank of England will intervene in the forex market by buying or selling British Pounds if they have determined it is substantially undervalued or overvalued, especially if its valuation is expected to have a negative effect on the UK economy.
Other Government Agencies
Many UK government agencies have foreign exchange exposure. Their currency exposures can arise from being exporters, importers or borrowers.
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