Exploring the Factors that Impact the GBP/USD Currency Pair

The British pound and U.S. dollar make up the currency pair or cross known as GBP/USD (British pound/U.S. dollar). The currency pair displays the number of US dollars (the quote currency) and British pounds (the base currency) required to buy one unit of each.

With a share of the forex market of around 11%, GBP/USD is the third-largest trading pair. Trading the cable is another name for trading the GBP/USD currency pair.

About the pair: A deeper understanding

1 British pound is worth X U.S. dollars when referring to the GBP/USD currency pair. If the price of the pair is 1.50, for instance, it indicates that 1.5 US dollars are needed to purchase 1 GBP.

Amongst the top 5 most popular currency pairs globally, the GBP/USD is traded the most. It is impacted by variables that affect the British pound’s and/or the US dollar’s value in comparison to other currencies and each other. Because of this, the difference in interest rates between the Federal Reserve and the Bank of England (BoE) will have an impact on the relative values of these two currencies.

The value of the GBP/USD cross might decrease as a result of the U.S. dollar gaining value relative to the British pound when the Fed intervenes in open market activity, for example.

More reasons that influence GBP/USD

Great Recession

The British pound’s value dropped during the Great Recession. The GBP/USD pair reached an all-time high in trading above $2.10 in 2007, but fell to below $1.40 in 2009, losing almost a third of its worth as investors rushed to the U.S. dollar, referred to as safe-haven currency. The British pound returned to trade at about 1.6 to the US dollar in roughly five years after the Great Recession.

Brexit

In June 2016, when Britain decided to exit the European Union, the GBP/USD saw yet another dramatic fall. In one trading session, the GBP/USD pair dropped 10%, and in the month before the Brexit vote, it lost about 20%. Investors withdrew capital from the United Kingdom at a record rate as a result of the decision to exit the EU, which was considered bad for the British economy since it would be required to renegotiate trade agreements.

Liz Truss succeeded Boris Johnson, who resigned in the wake of many scandals, as prime minister of the United Kingdom in September 2022. Immediately after taking over, Truss unveiled proposals for major tax cuts in an effort to increase economic productivity in the UK. Investors and currency traders, however, appeared to be worried that the Truss administration’s economic plans may raise the nation’s debt and worsen inflation, which was already at a high level. The GBP/USD fell to an all-time low of 1.03 on September 26, 2022, as a result of the market’s unfavourable response. The pair was trading at a little over 1.12 in early October 2022 after a minor comeback.

The Fed

The US dollar’s value is significantly influenced by the Federal Reserve’s (Fed) policies on interest rates and inflation. While high-interest rates make currencies more appealing to foreign investors, rising inflation devalues a currency’s worth.

The Bank of England

The Bank of England (BoE), the central bank of the United Kingdom, has an impact on the value of the British pound in a manner similar to how the Fed impacts the value of the dollar. The GBP/USD pair’s price may change in response to decisions made by the monetary policy committee (MPC) of the Bank of England. Rates are reviewed by the BoE and the Fed eight times each year.

Inflation

Numbers related to inflation are a key determinant of the Fed’s and the BoE’s interest rate policy. In order to slow down their economies and counteract rising inflation rates, central banks often boost interest rates. On the other hand, low inflation may cause them to lower interest rates.

Employment data

The health of the US and UK economies may be determined by looking at employment statistics, which also affects government and central bank policies on economic stimulation.

Changes in Geopolitics

The world’s reserve currency is the US dollar. It is seen as a shelter amid periods of political and economic unpredictability. Due to this, investors are compelled to sell other currencies and purchase the US dollar when events like the Russian invasion of Ukraine, occur.

Retail Sales

Retail sales and other consumer data releases are crucial economic health indicators that can influence perceptions of the pound and the dollar.

Industrial Output

Another crucial indicator of an economy’s growth or recession is manufacturing activity, which has an impact on the currency’s desirability.

How to trade the GBP/USD pair

Without holding the underlying asset, traders may use CFDs to take a long or short position on the GBP/USD exchange rate. For instance, you can sell short GBP/USD if you believe the value of the pound will decline versus the US dollar.

CFD contracts never run out of time. With a lower initial commitment, you can construct a leveraged position using margin. Keep in mind that leverage increases both gains and losses.

History

Despite previously outperforming the U.S. dollar, the British pound has slowly declined from a pre-World War II value of almost $5 to its current value of about $1.10. This is probably a result of the relative loss of the majority of the British colonies abroad and the relative reduction in British economic power, as well as the growing strength of the U.S. economy.

The pound has fallen generally, but it has also had short-term ups and downs. Prior to dropping the next decade to a low of $1.05. in 1972, it temporarily recovered a high of $2.65.

The value of the pound has been falling throughout the twenty-first century, from a peak of $1.90 to a current value of slightly around $1.10.

The coronavirus pandemic’s economic concerns, along with the loss of the European market, have generally lowered the outlook for the British economy.

GBP vs USD: Which is stronger?

Since the British pound (GBP) has traditionally outperformed the American dollar in value, one pound is equivalent to more than one dollar. But in recent years, the pound has lost ground against the dollar. A British pound is now worth around $1.15 at the time of writing.

Over the previous 20 years, the value of the pound has varied from $1.03 to $2.10, showing that traditionally, it has outperformed the U.S. dollar. The relative strength of a nation’s economy and interest rates are all highly correlated with investor preferences and currency strength. Despite the fact that one British pound is worth more than one U.S. dollar, there are many more dollars in circulation than pounds, which is another crucial consideration.

Disclaimer:

This information is not considered investment advice or an investment recommendation, but instead a marketing communication. IronFX is not responsible for any data or information provided by third parties referenced or hyperlinked, in this communication.