GBP/USD (British Pound/U.S. Dollar)

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). Trading the GBP/USD currency pair is also known as trading the “Cable.”

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.

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.

KEY TAKEAWAYS

  • The GBP/USD currency pair is among the world’s most-widely traded currency pairs.
  • It is affected by economic indicators and actions by the central banks in both countries to boost or devalue their currency’s value.

Great Recession and Brexit

During the Great Recession, the value of the British pound fell sharply. In 2007, the GBP/USD 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.

Correlations

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.

By JAMES CHEN

AdamFlorenzi

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