British Pound vs US Dollar (GBP/USD)

The GBP/USD currency pair reflects the exchange rate between the British pound and the US dollar, or the number of dollars (the quote currency) required to acquire one pound (the base currency). GBP/USD is the third-largest trading pair in terms of daily volume, consisting of the first and fourth most actively traded main reserve currencies, USD and GBP, respectively. GBP/USD is one of the earliest currency pairs traded and is also known as "Cable" in reference to the transatlantic cable used to transmit exchange rates between the two countries.

The British pound (also known as the pound sterling) is the oldest currency in use today. It is the official currency of the United Kingdom and several British Overseas Territories. After World War II, the US dollar supplanted the British pound as the primary reserve currency, a position it held for centuries. This shift in the global economy was largely due to the economic dominance of the United States and the establishment of the Bretton Woods system. However, despite losing its status as the primary reserve currency, the British pound remains an important currency in international trade and finance. 

The US dollar is the most widely transacted currency in the world, held by most central banks and investment institutions. It also acts as legal tender in a few countries, including Ecuador, El Salvador, the Marshall Islands, Micronesia, Palau, Timor-Leste, and Zimbabwe. Moreover, the dollar's dominance in international trade has significant implications for exchange rates and economic policies around the globe, and it can serve as a benchmark for nations that choose to link or peg their currencies to the dollar's value.

The importance of the British pound as a reserve currency has been declining over the past few decades, and the currency has become more volatile in the 2010s amid Brexit and other political instability.

GBP/USD traded above 2.00 in 2008 and has since then been in a steady downtrend, almost reaching 1.00 in 2022. It was the great financial crisis in 2008 that sparked the sell-off, but Brexit accelerated the pound´s decline. The currency pair reached an all-time low in September 2022 when the UK government unveiled plans to cut taxes and massively increase borrowing. The plans were eventually scrapped, and the pound has been recovering since then, driven by rising interest rates in the UK.

The EUR/USD pair has a significant positive correlation with the value of the GBP/USD pair. Together, the USD and EUR represent close to 80% of the world's foreign exchange reserves, while the GBP accounts for less than 5%. Additionally, the eurozone's GDP is nearly four times that of the United Kingdom within Europe. Consequently, the EUR/USD has a greater impact on the GBP/USD than the GBP has on the EUR. This was evident after the 2016 Brexit referendum when the GBP/USD fell 20% while the EUR/USD fell only a few percent.

Brexit, the process of the United Kingdom's withdrawal from the European Union, has significantly influenced the pricing of GBP/USD. Because of negotiations and trade agreements affecting the British economy, the pair displayed increased volatility. There are numerous trade-related issues between the UK and the EU that remain unresolved, as well as political developments in the UK, such as the possibility of a second Scottish independence referendum, which could make this volatility persist for years to come.

Historically, the combination has also demonstrated a correlation with oil price indices such as West Texas Intermediate (WTI). Although the United Kingdom had a substantial amount of domestic crude oil in the North Sea and was a net exporter of oil, its production and reserves have experienced a precipitous decline that is now stabilising. In the interim, US oil production has increased, particularly after 2008, transforming the country into a net exporter.

As global oil markets and geopolitical factors keep shifting, the continuance of the correlation remains uncertain. Potentially influencing the correlation between oil price indices and the economies of the United Kingdom and the United States are changes in production levels, technological advances, and shifts in global demand. In addition, advancements in renewable energy sources and efforts to reduce reliance on fossil fuels may affect the future trajectory of this correlation.

When trading GBP/USD, keep an eye on data releases and statements from influential United States and United Kingdom organisations.

• US Federal Reserve and Bank of England (BoE) announcements for Interest Rates and shifts in monetary policy. 
• US Bureau of Economic Analysis Department of Labour, and National Statistics (UK) for data on Trade Balance, Unemployment Rate, Consumer Price Index (CPI), and Gross Domestic Product (GDP).