What Is the GBP/USD (British Pound/U.S. Dollar)?
The GBP/USD (British Pound/U.S. Dollar) is an abbreviation for the British pound and U.S. dollar currency pair or cross. The currency pair tells the reader how many U.S. dollars (the quote currency) are needed to purchase one British pound (the base currency).
GBP/USD is the third-largest trading pair, accounting for about 11% of the total forex market. Trading the GBP/USD currency pair is also known as trading the "Cable."
- The GBP/USD currency pair is the world's third most widely traded currency pair.
- It is affected by economic indicators and actions by the central banks in both countries to boost or devalue their currency.
- The British pound is historically stronger than the USD, although it has steadily weakened in the decades after World War II.
- After the Great Recession, the pound lost nearly a third of its value as investors flocked to the dollar.
- Investors can trade the GBP/USD pair, along with other currencies, through any forex broker.
Understanding the GBP/USD (British Pound/U.S. Dollar)
The value of the GBP/USD pair is quoted as 1 British pound per X U.S. dollars. For example, if the pair is trading at 1.50 it means that it takes 1.5 U.S. dollars to buy 1 British pound.
The GBP/USD is among the top five most widely traded pairs in the world. It is affected by factors that influence the value of the British pound and/or the U.S. dollar in relation to each other and other currencies. For this reason, the interest rate differential between the Bank of England (BoE) and the Federal Reserve will affect the value of these currencies when compared to each other.
When the Fed intervenes in open market activities to make the U.S. dollar stronger, for example, the value of the GBP/USD cross could decline, due to a strengthening of the U.S. dollar when compared to the British pound.
The amount of money that changes hands through the GBP/USD pair every day.
Great Recession and Brexit
During the Great Recession, the value of the British pound fell sharply. In 2007, the GBP/USD pair traded to an all-time high above $2.10, before falling below $1.40, losing over a third of its value as investors flocked to the U.S. dollar—a so-called safe-haven currency. In the five or so years proceeding the Great Recession, the British pound recovered to trade around 1.6 against the U.S. dollar.
The GBP/USD had another sharp decline in June 2016, when Britain voted to leave the European Union. The GBP/USD pair fell 10 percent in one trading session and lost nearly 20 percent in the month proceeding the Brexit vote. The vote to leave the EU was seen as negative for the British economy as it would be forced to renegotiate trade deals and this uncertainty led to investors pulling money out of the U.K. at a record pace.
Over the last half of 2008, the British pound fell from $2.10 to below $1.40, losing over a third of its value. This is likely because investors considered the dollar a "safe haven" against market volatility.
The GBP/USD tends to have a negative correlation with the USD/CHF and a positive correlation to the EUR/USD currency pairs. This is due to the positive correlation of the euro, Swiss franc, and the British pound.
Prior to the Great Recession, the GBP/USD was highly correlated with the Australian dollar and the New Zealand dollar as investors purchased these high-yielding currencies in what is known as a carry trade strategy.
Although the British pound has been historically stronger than the U.S. dollar, it has steadily weakened from a pre-war value of around $5 dollars to the present value of $1.31. This is likely due to the relative decline of British economic power, and the loss of most of the U.K.'s overseas colonies, combined with the increasing strength of the U.S. economy.
Even though it has declined overall, the pound has also fluctuated up and down in the short term. In 1972, it briefly regained a high of $2.65, before falling the next decade to a low of $1.05.
In the 21st century, the pound has continued to trend downwards, ranging from a high of $1.90 to a present value of around $1.30. Economic uncertainties surrounding the coronavirus pandemic, combined with the loss of the European market, have overall weakened the prospects for the British economy.
Questions & Answers
How Do I Calculate GBP vs USD?
In order to convert British pounds into U.S. dollars, simply multiply the number of pounds by the GBP/USD exchange rate on the day of conversion. For example, if you were converting 800 British pounds into U.S. dollars on March 16, 2022, you would multiply £800 x 1.31$/£ (the exchange rate for the day) to get $1048 USD. To convert from dollars to pounds, you would simply divide by the exchange rate rather than multiply.
How Can I Trade GBP vs USD?
You can trade GBP and USD, along with any other currency pairing, through a forex broker. A forex broker is just like a stock brokerage, except they focus on foreign exchange products.
Is GBP Stronger Than USD?
The British pound (GBP) has historically been stronger than the U.S. dollar, meaning a single pound is worth more than a single dollar. However, the pound has weakened against the dollar in recent years. At the time of writing, a British pound is worth $1.31 USD.
Why Is the British Pound So Strong?
The pound has historically been stronger than the U.S. dollar, with pound values ranging from $1.20 to $1.70 over the past twenty years. Currency strength is closely tied to interest rates, investor preferences, and the relative strength of a country's economy. Another important factor is the number of dollars and pounds in circulation: even though one British pound is worth more than a single dollar, there are many more dollars in circulation than pounds.