Why GBP/USD is one of the most important currency couples?
The pound sterling and the US dollar are representative of two of the most powerful economies in the world. It’s the equivalent of Rocky v. Drago – politics and context aside. There’s a continual back and forth between these two currencies, although for the last twenty years the pound has remained stronger than the dollar, but not by a ridiculous amount. It’s also important to note that there are a lot more dollars in circulation than there are pounds, hence the pounds strength over the dollar. In the world of forex trading the GBP/USD is one of the most traded currency couples, due mainly to its high volatility and liquidity. This means there’s a lot of money at play, which in turn invites a lot of exchanges to take place and this in turn also has an impact on the volatility or movement of this currency pair. Politics and economics also play a significant role in the behaviour of this famed currency pair.
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GBP/USD: a brief history
For the majority of the 19th century going all the way to the start of World War I, £1 was worth almost five American dollars. During the US civil war, the pound practically doubled to $10 in value. For the longest time the pound sterling was the world’s largest currency, accounting for 60% of global debt being held in sterling – a by-product of British imperialism. Things remained this way up until WWI. The dollar began playing catch-up in the 1920s and after WWII and the Bretton Woods agreements which dictated that the US dollar would be pegged to the price of gold and become the unofficial reserve of the world, the pound to dollar exchange rate was fixed at £1:$4.03. In the 1970s, and spurred on by the oil crises of that decade, the Bretton-Woods system collapsed, the dollar abandoned the gold standard, and both currencies became free floating. Since becoming free floating currencies, the pound has always held a stronger position over the dollar, but not significantly – hence the popularity of the GBP/USD as the third most globally traded currency pair.
As it stands
In this currency pairing the pound sterling serves as what is known as the base currency while the US dollar is known as the quote currency. In essence, this means that the GBP/USD price at any given time is amount of dollars one pound will buy. For quite some time now traders have colloquially referred to the GBP/USD as the ‘cable’ and this is due to the fact that in the past a deep-sea cable used to relay the bid and ask quotes between London and New York. Even though the internet is now responsible for the delivery of such information, the name has stuck.
GBP/USD influential factors
There are many factors that can and will affect these two giant currencies. It’s not just the high liquidity and high volatility, although these two factors weigh heavily into why traders opt for this pair. Other factors to take into account are levels of employments, interest rates, GDP (gross domestic product), inflation rates, political climates and each respective domestic economy. For these reasons, it’s of paramount importance to follow applicable financial news outlets as these media groups often cover all the above mentioned contributing factors. If you want to learn more about GBP and USD as a currency couple, it’s advisable to sign up with outlets like Reuters and CNBC. Opening a demo account with a reputable online broker can also be of great assistance.
Out of all these factors, monetary policy is probably the most influential of the lot. Information conveyed from each currency’s central bank can have major implications on the currency pair value. Every month the Bank of England reviews interest rates whereby the US Federal Reserve does it eight times a year. Finally, lets us not forget about Brexit and it’s impact specifically on the pound. Brexit might have been finalised but the aftermath is sure to be ongoing until all polices and new arrangements are in place. This once again plays a role in the volatility of the GBP/USD price at any given time.