GBP/USD, or British pound to US dollar, is a major currency pair, meaning it is heavily traded in forex markets. While the pound tends to reflect the underlying strength of the UK economy, it also tends to track the euro given the UK's significant trading relationship with the Eurozone. Similar to EUR/USD, GBP/USD tends to rise during economic booms while selling off sharply during downturns. For example, GBP/USD sold off sharply during the 2008 financial crisis and after the Brexit referendum. In 2017, the pair rallied as the world enjoyed a period of strong economic growth.
Pound sterling is higher against all major currencies except the US dollar today. The British pound is currently the strongest versus the Australian dollar and the Japanese yen. Yesterday, the pound rebounded after news regarding a possible takeover of British pharmaceutical company Shire by Japanese competitor Takeda Pharmaceutical. Significant business investments can temporarily drive a currency higher.
Turning to recent news and events, there are a limited number of developments from the UK driving the currency today. Instead, the pound is trading as a function of international developments. Specifically, the euro is weakening thanks to poor Eurozone growth data, while the US dollar is strengthening thanks to rising US bond yields. While the pound's historically cheap valuation (relative to other major currencies) is one reason to buy the currency, slowing regional growth and US dollar strength is hurting the rally. Our short-term outlook on the pound is now neutral, while our medium-term outlook on the pound remains bullish
GBP/USD is currently above 1.3960. EUR/GBP is down slightly, with the exchange rate above 0.8740. The pound is up slightly against the Australian dollar and flat against the Canadian dollar. GBP/AUD is currently above 1.8440, while GBP/CAD is above 1.7940.
Looking at this week’s economic data from the United Kingdom, traders will be watching upcoming Q1 GDP growth figures. Public sector borrowing figures for March (-£0.262b vs. £1.600b expected) beat expectations. On Friday, the most important day, we’ll get Q1 GDP growth. We’ll also see GfK consumer confidence for April as well as Nationwide housing price growth for April. Last week, March inflation figures were below estimates while Governor Mark Carney downplayed the possibility of a rate hike in May.
The US dollar is rising against all major currencies today. The buck is currently the strongest against the Australian dollar and the Japanese yen. Yesterday, the dollar gave up some of its recent gains despite soaring US Treasury bond yields. Following recent strength in the currency, we have upgraded our short-term outlook on the dollar to bullish.
Turning to recent news and events, 10-year US Treasury bonds are currently yielding 3.003%. The last time 10-year Treasuries traded above 3% was in April 2011. Relative to other major currencies, US government bonds offer significantly higher relative interest rates. For example, the spread between US 10-year and German 10-year bonds is currently near all-time highs. Last year, soaring US bond yields had a limited impact on the currency as investors chased riskier investments such as technology and emerging markets stocks.
As growth outside the US decelerates (while US growth remains strong), bond yields are starting to have an influence on riskier investments. Yesterday, both house prices and new home sales were ahead of expectations. Despite the good economic data, the S&P 500 and the NASDAQ sold off sharply in response to rising yields. Our short-term outlook on the US dollar is bullish, while our medium-term outlook remains neutral.
USD/JPY is up today and currently trading above 109.0. EUR/USD is down slightly and trading above 1.2210. The pound is down slightly, and GBP/USD is currently above 1.3960.
Looking at economic data and events from the US this week, traders will be paying close attention to upcoming Q1 2018 GDP growth figures. The Chicago Fed national activity index for March (0.1 vs. 0.27 expected) was below expectations. Existing home sales for March (5.6m vs. 5.5m expected), Markit services PMIs (54.4 vs. 54 expected), and manufacturing PMIs (56.5 vs. 55 expected) were ahead of expectations. S&P/Case-Shiller home prices for February (6.8% vs. 6.3% expected) and March MoM new home sales (4% vs 1.9% expected) were both ahead of expectations. Later today, we’ll see weekly initial jobless claims figures as well as durable goods for March. On Friday, the most important day, we’ll see Q1 GDP growth and Q1 personal consumption expenditures. We’ll also see the Michigan consumer sentiment index for April. Last week, the Fed’s Beige Book suggested that growth continues to accelerate at a moderate pace.
As the pair trades sideways, we are now neutral on the pair. GBP/USD is now trading within normal conditions in the short-term. This is based on various technical analysis tools on a daily chart.
As the pound strengthens, we are now bullish on GBP/USD in the medium-term. The currency pair is now trading within a normal range. This is based on various technical analysis indicators on the weekly chart.
The outlook for the pound, while still bullish, is looking less optimistic today. More specifically, factors including the ongoing slowdown in regional growth, lower expectations for a May rate hike, and significant speculator interest in the currency are hampering the rally. Following Brexit, the trade-weighted value of pound sterling (a measure of GBP relative to other currencies) hit an all-t…
Looking at the British pound today, concerns regarding Brexit and the stock market rout are outweighing the Bank of England’s positive economic outlook. As a currency that benefits from rising risk appetite, pound sterling has been selling off sharply in February thanks to fears regarding elevated asset prices. While Bank of England Governor Mark Carney helped the pound last Thursday after saying…
In our last take on the British pound in early January, we wrote that the currency was set to keep strengthening thanks to strong regional growth, moderate sentiment and the historically low value of the pound. More specifically, the currency looks cheap based on broad nominal effective exchange rates (a measure of the pound relative to other foreign currencies). Looking at GBP/USD since our last…
In our previous take on the US dollar in early February, we wrote that the currency was set to remain weak. At the time, ex-US growth was accelerating, while speculator sentiment was only mildly bearish. While dollar bulls have argued that rate hikes should help the currency, we wrote that expectations for monetary tightening were rising around the world, limiting the impact from the Fed’s action…
The US dollar currency index, a measure of USD against six major peers, declined by 9.9% in 2017. Last month, the currency index continued declining and fell by another 3.3%. Given the speed of the recent decline, the US dollar started looking oversold according to technical indicators around mid-January. While we warned that the currency was looking oversold in several recent editions of our US …
Looking at this week’s Commitments of Traders Report, bullish extremes continue in long crude oil, the euro and the British pound. Net long positions have also grown this week for the two currencies and the commodity. The purpose of this report is to track how the consensus is positioned across various currencies and commodities. When net long positions become crowded in either direction, we fla…
Significance of the GBP/USD pair
GBP/USD is a major currency pair, meaning it is among the most heavily traded pairs in the foreign exchange market. The US dollar is the most traded currency in the world, while the British pound is the fourth-most traded currency. Looking at the characteristics of this pair, the pound and the dollar tend to move in opposite directions.
Given its status as the global reserve currency, the US dollar is borrowed heavily by international borrowers. As international lending accelerates when global economic growth is high, the US dollar tends to depreciate as more and more dollars chase international investment opportunities. During a downturn, foreign borrowers struggle to pay back US dollar-denominated loans, and the currency rises sharply as a result. This is typical behavior for a safe haven currency. The pound typically moves in the opposite direction, and strengthens during booms and weakens during downturns. Relative GDP growth rates for the United Kingdom and the United States are shown below:
2006 – late-2007: Pre-financial crisis boom
Leading up to the financial crisis, optimism for global economic growth was very high. In the US, early tremors in the real estate markets led investors to seek investment opportunities overseas. As a result, the US dollar began its descent in 2006 and weakened broadly against most other currencies. Relative to the troubles brewing in the US, Europe appeared to be a safe haven. As a result, the British pound (alongside the euro) began rallying in 2006. Looking at GBP/USD, the pair strengthened from around 1.75 at the start of 2016 and peaked above 2.10 in November 2007. Prior to 2007, the last time GBP/USD traded above 2.00 was in late 1992.
Late-2007 – mid-2008: Early jitters
Starting in mid-2007, investors began reducing exposure to the riskiest investments. This marked a significant change from the bullish euphoria of 2006 and early 2007. The carry trade (borrowing low-yielding currencies and investing the proceeds in high-yielding currencies) began unraveling in mid-2007. Currencies borrowed in the carry trade (such as the yen) began rallying while high-yielding currencies such as the Australian dollar began selling off.
GBP/USD only began selling off in November 2007. By September 2008, the exchange rate had declined to around 2.00.
Mid-2008 – early-2009: The global financial crisis
Starting in September 2008, panic in wholesale lending markets regarding a shortage of US dollars resulted in the sharp appreciation of the US dollar and a concurrent selloff in the British pound. While the pound had served as a safe haven from troubles in the US earlier in the year, troubles in offshore US dollar lending markets (known as the ‘Eurodollar’ market – note the term ‘euro’ denotes an offshore currency as opposed to the Eurozone’s currency) resulted in GBP/USD’s sharp sell-off.
Prior to the crisis, European banks (such as Northern Rock in the UK) funded themselves by borrowing US dollars in Eurodollar lending markets. As Eurodollars were plentiful and cheap, European financial institutions found borrowing reserves from wholesale lenders much cheaper than trying to raise retail deposits. As a result, European banks owed US dollars to their creditors, while making typically investments in a foreign currency. In other words, banks such as Northern Rock were effectively short the US dollar. While this trade worked wonders when the US dollar continuously weakened, it stopped working once the US dollar began strengthening.
Starting in September 2008 (and following the bankruptcy of Lehman Brothers in particular), Eurodollar lenders began doubting the ability of borrowers to repay loans. As borrowers feared that they would be unable to rollover their Eurodollar loans, many sold their investments (often denominated in foreign currencies) in order to buy US dollars. The US dollar rose sharply as a result. As London is the world’s leading Eurodollar lending market, perceived risk in the country’s financial industry led to a particularly acute sell-off in the pound. By the second week of 2009, GBP/USD had fallen below 1.40.
Early-2009 – mid-2010: Rebound and Eurozone crisis
Following the extreme sell-off during the financial crisis, GBP/USD rebounded by mid-2009. The pair was trading around 1.65 by the summer of 2009. The US dollar also broadly sold off during this time (after rising sharply in late 2008).
Unfortunately for the pound, the rebound was fairly short-lived. Starting in late 2009, the media began reporting that Greece had concealed the true nature of its government debt. Debt problems also began appearing in other peripheral Eurozone countries including Ireland, Portugal, Italy and Spain. As German and French banks owned substantial quantities of Eurozone government bonds, investors feared that the region’s banking system was at risk. The euro began selling off, and the pound followed suit. Given the UK’s significant trading relationship with the Eurozone, the pound tends to track the fortunes of the euro.
By May 2010, GBP/USD had declined to around 1.45.
Mid-2010 – mid-2014: Slow-motion rebound
Thanks to the rollout of several European Central Bank programs designed to bring confidence to the Eurozone’s banking system (such as the European Financial Stability Facility and the European Financial Stabilization Mechanism), the fortunes of the euro and the pound improved after the summer of 2010.
While the euro fluctuated in the following years as confidence rose and fell with each new ECB measure, the pound was more stable against the US dollar. Looking at GBP/USD between August 2010 and October 2013, the pair traded in a fairly narrow range between 1.48 and 1.68. Unlike the Eurozone, the UK did not experience negative GDP growth rates during these years. Furthermore, the country’s currency was not facing an existential threat (many believed the Eurozone would break up during this time). As such, the pound was a relative safe haven from the Eurozone’s troubles and was far more stable.
Starting in late 2013, the pound began rallying thanks to strong GDP growth both in the UK and in the broader region. The currency was also bolstered by comments from Bank of England Governor Mark Carney. Specifically, he noted that the Bank’s low interest rate policy was not permanent. As the currency rallied on expectations of tighter monetary policy, GBP/USD peaked above 1.70 in July 2014.
Mid-2014 – 2017: Euro sell-off and Brexit
The adoption of extraordinary monetary policy by the ECB (negative rates and quantitative easing) as well as a sharp sell-off in crude oil in mid-2014 led to significant dollar strength. Looking at GBP/USD, the pair had fallen to around 1.47 by April 2015.
While the pair rebounded to around 1.58 by June 2015, slowing global growth meant that the pound was broadly under pressure. The pound continued selling off for the rest of 2015. In the first half of 2016 (prior to the Brexit referendum vote), GBP/USD traded in a tight range between 1.38 and 1.50. Prior to the day of the vote, the pound rallied as most polls indicated that the “No” side would prevail.
After the pro-Brexit side won the referendum, the pound began selling off sharply. GBP/USD ended the day below 1.37. By the end of the year, the exchange rate had depreciated further to around 1.22.
2017 – early-2018: Recovery and optimism
Following the shock of the Brexit vote, many predicted that the UK would enter a recession coupled with currency devaluation-fueled inflation. This led to the pound’s sharp sell-off in 2016. Instead, the pound rallied in 2017 as growth was better than expected. While inflation rose above the Bank of England’s target rate, the BoE raised rates in order to limit its impact on the economy. This provided further support for the currency. Starting in May 2017 (following Macron’s victory in the French presidential elections), the euro began rallying as fears of a Eurozone breakup subsided. The pound soon followed, and GBP/USD ended the year above 1.35.