One of the largest and most commonly traded currency crosses on the forex market is the British pound sterling to the United States dollar. Often referred to as the "cable," in reference to the transatlantic telegraph wires connecting London and New York, GBP/USD represents nearly 15% of the total daily volume of transactions on the forex. With such a formidable volume, GBP/USD is a definitive major pairing and also a benchmark by which exchange rate valuations are measured globally.
Similarities between the two nations' economies are numerous and striking in nature. Both rank among the global elite as defined by GDP purchasing power parity, with the U.S. coming in third globally, and the U.K. rounding out the top ten. Both countries have large labour forces and rely heavily upon the service sector of their respective economies to generate the bulk of annual GDP.
Impact Of Brexit On GBP/USD
From a fundamental standpoint, the economy of the U.K. is poised to evolve upon completion of the Brexit transition process. Following its final departure from the European Union (EU), the U.K. will be free to craft its own trade policies as deemed fit. Although the ramifications of Brexit remain to be seen, market analysts project economic contraction for Great Britain. According to researchers at the Rand Corporation, a departure from the EU will pose an economic slowdown of varying degrees, leaving the U.K. "worse-off."
One side-effect of Brexit may be an increased interrelationship between the U.K. and U.S. economies. Comments from the Trump administration have illustrated a willingness to expand unilateral trade between the two nations through enhancing commercial ties. Industries that may be impacted include the import/export of crude oil, automobile manufacturing and financial services. However, the follow-through on these sentiments will depend upon the political leadership of each nation and commitment to establishing long-lasting agreements.
GBP/USD Exchange Rate Fluctuations
Dating back to 1800, the GBP/USD exchange rate has been a staple of the world's foreign exchange marketplace. From the years 1800 to 1900, the exchange rate, as reported by governmental sources, traded in a range of £1=US$9.97 (1864) to £1=US$3.62 (1812).. The fluctuations in the exchange rate from this period carry a special significance. At the time, the United States was a fledgling nation and still under the influence of both British political and economic capital. The ability of the U.S. to survive without British intervention was very much in question, and it was not until the dawn of the 20th century that the U.S. gained acceptance as an independent economic power.
Between the years of 1860 and the outbreak of WWI in 1914, nearly 60% of global trade was conducted in British pounds. The pound faded as the world's currency standard until it was replaced during the WWII era. In 1944, the pound was pegged to the U.S. dollar in concert with the global implementation of the Bretton Woods monetary system. Upon the dissolution of the Bretton Woods system in 1971, the pound became a floating currency, with its value against the U.S. dollar being of constant concern to the British economy.
During the period of 1971 to 2015, the exchange rate ranged from £1=US$2.50 (1972) to £1=US$1.34 (1984). Aside from periods of short-term volatility, the long-term stability of the pound/dollar relationship has been a calling card of the U.S. and U.K. political and economic partnership.
GBP/USD exchange rate consistency was put to the test during the 2020 coronavirus (COVID-19) pandemic. Amid widespread economic lockdowns and plunging FTSE 100 and NASDAQ 100 equities index valuations, the GBP/USD traded in an extended-but-stable range.
This behaviour contradicted trend-oriented facets of technical analysis and proved that pound/dollar pricing was largely elastic in nature. During the initial stages of the COVID-19 contagion (2 March 2020 to 1 October 2020), the GBP/USD gained a modest 1%. Even though volatility throughout the first seven-months of the coronavirus was extreme, exchange rates regularly gravitated toward their 12-month median value (1.2462).
Past Performance: Past Performance is not an indicator of future results.
Key Facts GBP/USD
British Pound Sterling (GBP)
- Currency overview: The British pound, also known as the "pound sterling" or simply as the "pound," is the third-most commonly traded currency on the forex market. In addition to being traded in high volumes, the pound is also the third-largest reserve currency in the world behind the United States dollar and the euro.
- Central bank: Bank of England
- Currency code: GBP
- History: The pound sterling is the world's oldest currency still in use. The first pound coinage dates back to the late 15th century, with the pound sterling's value being derived from one pound of silver. The pound sterling was originally divided into the subunits of 20 shillings, with each consisting of 12 silver pence. The system remained in use until 1971, when the pound underwent a process of decimalisation, which changed the subunit of one pound to 100 pence. The pound was pegged to the United States dollar during the WWII era, in accordance with the Bretton Woods monetary system. With the dissolution of Bretton Woods in 1971, the pound took its current form as a "floating currency."
- Economy: The U.K. is ranked number 10 globally in terms of GDP purchasing power parity, with a total output of US$2.66 trillion annually. The U.K. also ranks as the third-largest economy in Europe behind Germany and France. Key production industries that drive output are agriculture and energy production (coal, oil and natural gas). Service industries such as banking, insurance and other business services comprise a large part of GDP output.
- Currency subunits: One British pound consists of 100 "pence"
- Denominations: Bills: £5, £10, £20, £50; Coins: 1p, 2p, 5p, 10p, 20p, 50p, £1, £2, £5
- Countries and territories using the GBP: United Kingdom, Isle of Man, Channel Islands, South Georgia, South Sandwich Islands, British Antarctic Territory and Tristan da Cunha
- Currencies pegged to the GBP: Gibraltar pound, Falkland Islands pound and Saint Helena pound. All are separate, regional currencies pegged at parity with the GBP.
- The GBP/USD pairing is considered to a "major" currency pair. Other commonly traded pairings including the pound are with the Japanese yen (GBP/JPY), euro (EUR/GBP), Swiss franc (GBP/CHF) and the Australian dollar (GBP/AUD).
U.S. Dollar (USD)
- Currency overview: The USD is the official currency of the United States and its inhabited territories. The USD acts as the world's reserve currency, with 62% of global foreign exchange reserves held by central banks being denominated in USDs.
- Currency code: USD
- Central bank: United States Federal Reserve
- History: The Coinage Act of 1792 put into place the United States' first organised monetary system. Paper banknotes (dollars) were introduced into circulation in the mid-1800s. The Federal Reserve act of 1913 created the central bank of the US, the Federal Reserve. During the post-WWII era, the USD became the world's reserve currency via the implementation of the Bretton Woods Accords.
- Economy: The United States economy is considered to be a "mixed" economy, with both private industry and governmental intervention contributing to the overall economic output. The U.S. accounts for nearly 25% of global GDP annually.
- Currency subunits: 1 USD consists of 100 cents
- Denominations: Bills: $1, $5, $20, $50, $100; Coins: 1c, 5c, 10c, 25c, 50c, $1
- Sixty-six countries peg the value of their currency to the USD, or directly use the USD as their national currency.
- Four currency pairings including the USD are referred to as "majors." The USD/JPY, GBP/USD, USD/CHF, and the EUR/USD.
This article was last updated on 5th November 2020.
Russell Shor (MSTA, CFTe, MFTA) is a Senior Market Specialist at FXCM. He joined the firm in October 2017 and has an Honours Degree in Economics from the University of South Africa and holds the coveted Certified Financial Technician and Master of Financial Technical Analysis qualifications from the International Federation…