What is the Cable?
Cable is a slang term for the exchange rate between the U.S. dollar (USD) and the British pound sterling (GBP). The term is used among forex traders and can also refer to the British pound sterling. Since the pound versus the dollar is one of the most commonly traded currency pairs, the term is heard frequently and is used interchangeably with the GBP/USD.
- The cable refers to the British pound (GBP) as it relates to the U.S. dollar (USD), with the exchange rate typically quoted as GBP/USD.
- The term cable comes from the telegraph days when the pound and dollar were the most traded currencies.
- At of the completion of 2018, the GBP is the fourth largest reserve currency in the world, following the yen, euro, and dollar and first place.
- The GBP was the primary reserve currency, but started to lose ground to the USD following World War I.
Understanding the Cable
Cable only refers to the British pound with reference to its trading against the dollar, typically quoted as GBP/USD.
Quotes against other currencies such as the euro or the Japanese yen refer to the pound as sterling (not cable), as in "I need a price in sterling/yen" or "I think euro/sterling will rebound from its current lows."
The currency code for the pound is GBP, which stands for Great Britain pound. You may hear someone dealing in the forex market say "Cable is up today" or "Cable has been trending lower lately." The symbol for the British pound is £.
This term cable supposedly derives from the advent of the telegraph in the mid-19th century. The pound was the dominant currency at the time, and transactions between the pound and dollar were executed via transatlantic cable. Forex traders are sometimes referred to as "cable dealers, although this phrase is no longer commonly used.
Dominant Currency Until the Post-World War II Period
The British pound, or pound sterling, is considered the oldest currency still in use. It was the world's dominant currency for centuries, and thus was considered the primary reserve currency in which other nations held their excess cash.
As the British Empire dominated global commerce, the pound dominated international finance. It was legal tender in most colonies, including large portions of Africa and Asia. The Empire began to fade following World War I, as the enormous economic cost of the war took a toll on the economy.
With the British government heavily in debt to the United States, the dollar began to assume the reserve currency status that the pound previously held. This change was complete by 1949 when the British government was forced to devalue the pound by 30.5%. By the early part of the 21st century, the dollar was the world's leading reserve currency, followed by the euro. According to the International Monetary Fund (IMF), the pound has settled into fourth place at the completion of 2018, trailing the Japanese yen.
In foreign exchange, the base currency is the one against which another currency is compared. When the pound was the world's dominant currency, it was also the base currency for trading, so a price quote indicated the amount of currency X that needed to be exchanged for the pound.
It is still the base currency in trades against the U.S. dollar, Canadian dollar (CAD), and Japanese yen (JPY), among others. Therefore, the pound is typically quoted as GBP/USD, GBP/CAD, and GBP/JPY.
But when the euro (EUR) started trading on Jan. 1, 1999, it took over base currency status for any combination in which it was traded. Therefore, when comparing the euro to the pound, it is typically quoted as EUR/GBP.
To find the reverse rate, such as how many GBP it takes to buy one USD (which is USD/GBP), divide one by the GBP/USD rate. For example, if the GBP/USD rate is 1.3050, to get the USD/GBP rate, divide one by 1.3050 for a rate of 0.76628.
Examples of How the Cable Has Historically Moved
When charting the GBP/USD, if the rate is rising it means the GBP is performing better than the USD, or the USD is underperforming the GBP. This is because it is taking more and more USD to buy one GBP.
When the GBP/USD rate is falling, that means it costs less USD to buy one GBP, and therefore the GBP is declining in value relative to the USD.
The following chart shows the GBP/USD rate from mid-2002 to mid-2019.
On the right, the rate shown is 1.27048. That means it costs 1.27048 USD to buy one GBP.
To find out how many GBP it costs to buy one USD, divide one by 1.27048. This gives a rate, for the USD/GBP, of 0.7871.