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. dollarcurrency pair, or cross. The currency pair shows 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 as of 2023. Trading the GBP/USD currency pair is also known as trading the "cable."
Key Takeaways
- 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 U.S. dollar, although it has steadily weakened in the decades after World War II.
- After the Great Recession, the pound lost nearly one-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 with 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 with the British pound.
$432 billion
The daily turnover of the GBP/USD pair in 2022.
Great Recession, Brexit, and Beyond
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 in 2009, losing over one-third of its value as investors flocked to the U.S. dollar—a so-called safe-haven currency. In the approximately five years following 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% in one trading session and lost nearly 20% in the month preceding 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.
In Sept. 2022, Liz Truss took over as U.K. prime minister, replacing the embattled Boris Johnson, who resigned amid multiple scandals. Upon taking the reins, Truss announced plans for widespread tax cuts, hoping to boost U.K. economic productivity.
However, investors and forex traders were apparently concerned that the economic policies of the Truss government could increase the country's debt and exacerbate inflation, which was already at an elevated level. The market's negative reaction sank the GBP/USD to an all-time low of around $1.03 on Sept. 26, 2022. Following a slight recovery, the pair was trading in early Oct. 2022 at just over $1.12.
In 2023, the rate climbed up again, whereby from March 2023 to June 2023 it had a steady increase, sitting at approximately $1.28 by the middle of June.
From the last half of 2008 to early 2009, 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.
Correlations
The GBP/USD tends to have a negative correlation with the USD/CHF and a positive correlation with 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.
Historical Data
Although the British pound has been historically stronger than the U.S. dollar, it has steadily weakened from a pre-World War II value of around $5 to the present value of around $1.28 as of June 2023. 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 downward, ranging from a high of $2.08 to a present value just above $1.08. Economic uncertainties surrounding the coronavirus pandemic, combined with the loss of the European market, have overall weakened the prospects for the British economy.
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 June 17, 2023, you would multiply £800 x $1.28 (the exchange rate for the day) to get $1,024. 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) historically has 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, particularly since the financial crisis of 2008.
Why Is the British Pound So Strong?
The pound historically has been stronger than the U.S. dollar, with pound values ranging from $1.08 to $2.08 over the past 20 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.
The Bottom Line
GBP/USD refers to the currency pair of the U.S. dollar and the British pound, which is among the most widely traded in the world. The current value of the GBP/USD pair shows how many U.S. dollars are needed to purchase one British pound. Many factors affect the GBP/USD rate, including economic indicators and actions by the central banks in both countries to boost or devalue their currency.
