GBP to USD
The GBP/USD pairing is one of the most cash-rich, liquid currency pairs on the foreign exchange (forex) market. It’s also the third most traded currency pair in the world.
The Dollar and Pound, together with the Euro, Japanese Yen and the Chinese Yuan, form the basket of currencies used to work out the value of the International Monetary Fund (IMF) special drawing rights.
A recent IMF report showed that some 62% of the world’s currency reserves are held in American Dollars.
For its part, sterling is one of the world’s most financially and economically significant currencies. It’s also the fourth most traded currency in terms of turnover, and the third most widely held globally.
So it’s hardly surprising that both these currencies are traded at such high levels every day of the year.
How to play
While the history of the American dollar begins in 1792, that of the British pound dates back to Anglo-Saxon times, when it was worth the equivalent of a pound of silver.
Until the outbreak of World War One, every pound was worth just under $5. The Bretton Woods system, under which all currencies were linked to the dollar, lasted from the 1940s until 1971. After which the pound became the free-floating currency it is today.
Since the mid-1980s, the exchange rate for the pound has varied between $1.30 and $2. Over the long term, the pound has been weak against the dollar. It’s depreciated by around 1% a year since the start of the twentieth century. But under the real or inflation-adjusted exchange rate, it has only weakened over the same period by 0.22% a year.
Factors affecting the USD/GBP exchange rate
- Any developments in the American/British political relationship, plus the individual economic performance of either nation and the perceived relative strength of each economy. When the UK’s economy grows more quickly than that of the US. Or British business becomes relatively more competitive, the pound is likely to gain value against the dollar and vice versa.
- If the Bank of England raises interest rates to curb inflation, this also fuels sterling’s rise. Equally, if inflation in the UK is relatively lower, and UK exports become more competitive, there will be greater demand for the pound.
- A response to wider political and economic events. For instance, the 2009 global financial crash, tensions in the Gulf or ‘Black Wednesday’ when the UK had to withdraw from the European Exchange Rate Mechanism.
- Each month, economic data for both countries is released, offering a clearer idea of the country’s economic stability – this, in turn, influences confidence on converting pound to dollars (or vice versa)
- Equally, the balance of payments, government debt and intervention, recession all play their part
Trading is possible 24 hours, but you may fare better while the markets are open on both sides of the Atlantic.
Warnings on USD/GBP trading
This is a volatile currency pairing, which can mean a wider price range, but things can also shift very quickly. Equally, there can often be false indications as to which way this movement will go.
However, with so much price information available on these two currencies, from two of the world’s most modern economies, you can trade in relative safety.
Individuals can trade GBP/USD with either a forex contract or a Contract for Difference (CFD) on a specific currency pair, and speculate on the price difference.
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