British Pound Sterling in Forex: Why GBP Still Remains Fundamental for Traders

The British Pound (GBP) holds a privileged position in global financial markets as the fourth most valued international currency and the oldest still in circulation. Its importance in currency trading is undeniable: it accounts for approximately 20% of all daily Forex transactions, ranking only behind the US dollar, the Japanese yen, and the euro.

The British Pound: A Key Piece in International Markets

The symbol £ represents the official currency of the United Kingdom and its dependent territories, while GBP is its abbreviation in trading systems. It is important to distinguish between GBP (the full pound) and GBX (pence, which is 1/100 of a pound), a crucial difference especially in stock markets where shares are usually quoted in pence.

As the fourth currency in the IMF (Special Drawing Rights Currency Composition) according to the International Monetary Fund, the British Pound is extensively held in global reserves. The Bank of England, in its role as central bank, regulates monetary policy and controls the circulation of this currency, whose value is directly influenced by economic indicators such as inflation, GDP, and employment.

The United Kingdom, the sixth-largest economy by GDP, has experienced significant fluctuations in its currency since the Brexit referendum in 2016. That event marked the beginning of economic and political volatility, with the pound falling from a high of 1.43 against the euro in 2015 to a low of 1.10 in October 2022, stabilizing at 1.1710 euros per pound in early 2024.

Forex Market Dynamics and the Role of GBP

In the 24-hour Forex ecosystem, where multinational companies and investors constantly trade, the British Pound is fundamental. The concept of spread (difference between bid and ask price) is essential: low spreads indicate high liquidity and reduced costs, while high spreads reflect lower liquidity and higher transaction costs.

The main pairs involving GBP are divided according to their liquidity and characteristics:

GBP/USD (The “Cable”): This pair represents 11% of total Forex volume, exchanging approximately $330 billion daily. As of February 5, 2024, it trades at 1.2585 dollars, with a 52-week range of 1.1803 to 1.3146 and an annual variation of 4.5%. Extreme liquidity allows order execution in fractions of a second with an average daily volatility below 1%. In the first week of February, the pound faced its largest weekly decline against the dollar since December, dropping 0.66%, after US employment data reduced expectations of Federal Reserve rate cuts.

EUR/GBP (Eurozone-UK relationship): Ranking eighth in liquidity with 3% of Forex volume, this pair reflects divergence in monetary policies between the European Central Bank (4.5% rates) and the Bank of England (5.25%). It currently trades around 0.8580 pence per euro, with an annual range of 0.8493 to 0.8983 and a change of -4.54%. The UK’s higher inflation (4% vs 2.8% in the eurozone) and the BoE’s reluctance to make immediate rate cuts have supported the pound.

GBP/CHF (British stability vs Swiss refuge): With only 0.73% of total volume, this pair shows lower liquidity but is characteristic of the inherent strength of both currencies. The Swiss franc, the currency of the sixth-largest economy by reserves, acts as a safe haven. With a 52-week range of 1.0558 to 1.1547 and an annual variation of -2.04%, the strength of the pound persists thanks to favorable interest rate differentials (BoE 5.25% vs Swiss National Bank with comparatively low rates).

GBP/JPY (The “Dragon” Volatile): Known for its high volatility, this pair offers dynamic speculative opportunities. As of February 5, 2024, it trades in a range of 157.394 to 188.957 with an annual variation of 17.28%. Divergent monetary policies between Japan (negative rates of -0.1%) and the UK generate rapid movements. The yen, often considered a refuge in geopolitical uncertainty, is pressured by expectations of more aggressive easing cycles by the Bank of Japan.

Factors Determining GBP Fluctuations

Beyond raw data, multiple economic and political variables shape the behavior of the British pound in markets:

Monetary Policy: The Bank of England’s interest rate adjustments are crucial. Currently at 5.25%, any change in these levels causes ripple effects across all GBP pairs.

Macroeconomic Conditions: Inflation (currently 4%), unemployment, trade balances, and GDP growth directly affect confidence in the currency.

Geopolitical Context: Tensions in the Middle East, US presidential elections, and other global events introduce uncertainty that typically strengthens safe-haven currencies.

Policy Divergences Between Economies: Divergences among the BoE, Federal Reserve, and European Central Bank create opportunities and risks depending on the pair.

Opportunities for Different Investor Profiles

For long-term investors, the fundamental stability of the UK economy and the relative strength of the pound despite recent challenges position it as a solid component in diversified portfolios.

For short-term traders, the volatility of GBP/JPY and GBP/USD, driven by divergences in monetary policy, offers speculative opportunities. Rapid movements allow traders with derivatives instruments to capitalize on market reactions to economic announcements and monetary policy decisions, leveraging uncertainty as a strategic advantage.

Conclusion

In an increasingly interconnected market environment, understanding the role of the British pound and its various currency pairs is essential. From the most liquid “Cable” to the volatile “Dragon,” each combination offers distinct characteristics that can suit different strategies and risk profiles. The key is to stay attentive to economic indicators, Bank of England decisions, and geopolitical developments that constantly redefine the value of these pounds in global markets.