GBP and GBX: Complete Guide to Understanding the British Pound Sterling in the Currency Markets

The British Pound, identified with the code GBP, represents the official currency of the United Kingdom, the South Sandwich Islands, and several British overseas territories. Globally, it ranks fourth among the most valued currencies, with an approximate exchange rate of 1.2627 US dollars per pound. In the Forex markets context, this currency plays a crucial role, generating around 20% of the total daily transaction volume, ranking only below the US dollar, the Japanese yen, and the euro.

What is GBX and how does it differ from GBP?

It is essential to understand the distinction between GBP and GBX to participate efficiently in financial markets. While GBP is the official abbreviation for the British Pound, GBX represents the pence, equivalent to one hundredth of a pound (1/100). This differentiation is particularly relevant in stock markets, where shares are often quoted in pence rather than pounds, so traders use the GBX code to conduct these transactions unambiguously.

The symbol for the British Pound is £, and the currency is commonly known in financial circles as “Quid.” The pound is recognized as the oldest active currency in the world and ranks as the third most important reserve currency globally, according to International Monetary Fund data.

The global position of the British Pound

The Bank of England (BoE), as the central authority, issues banknotes and sets monetary policy for the British Pound. The United Kingdom, ranked as the sixth-largest economy in the world in terms of Gross Domestic Product according to the World Bank, has experienced significant changes in its currency’s exchange rate, especially after the Brexit referendum held on June 23, 2016.

Since reaching a maximum of 1.43 against the euro in November 2015, the GBP/EUR exchange rate has remained below 1.2 since July 2016, reaching a low of 1.10 in October 2022. As of February 2024, parity stood at 1.1710 euros per pound, reflecting the inherent volatility characteristic of this currency in the current economic environment.

The current context of the British economy

The British economy currently faces multiple challenges that directly influence the value of the pound. Political instability, high inflation around 4%, and the impact of recent interest rate hikes (situated at 5.25%) create a complex scenario. Additionally, the global energy crisis and geopolitical tensions, particularly in the Middle East, add further layers of uncertainty affecting GBP’s quotation in international markets.

These factors have contributed to increased volatility, demonstrating the currency’s sensitivity to changes in the macroeconomic landscape both nationally and internationally.

GBP in the Forex market: Fundamental concepts

The Forex market is a global environment where currencies are traded continuously 24 hours a day. This market is essential for multinational companies requiring transactions in multiple currencies and for investors seeking to capitalize on exchange rate fluctuations, whether through long-term strategies based on regional economic projections or short-term tactics exploiting volatility.

The concept of spread in currency trading

A critical aspect of Forex trading is the spread, which represents the difference between the bid and ask prices of a currency pair. The spread functions as a direct indicator of market liquidity and transaction costs: a narrow spread indicates high liquidity and lower operational costs, while a wide spread may suggest the opposite. Traders must carefully evaluate these spreads when executing trades, as they directly impact investment profitability.

Major currency pairs with GBP

Below are the most relevant currency pairs associated with the British Pound:

Pairs like GBP/USD and EUR/GBP, characterized by higher liquidity, typically offer narrower spreads, making them attractive options for investors. Conversely, pairs like GBP/CHF exhibit wider spreads due to lower trading volume.

GBP/USD: The Cable and its importance in trading

The GBP/USD, commonly called “The Cable” in financial circles, is the abbreviation for the currency pair of the British Pound and the US Dollar. This pair indicates how many US dollars are needed to buy one British Pound and is the third most traded currency pair globally, accounting for approximately 11% of total Forex market volume.

The high daily trading volume, reaching about 330 billion dollars, implies high market liquidity. This liquidity allows buy and sell orders to be executed in fractions of a second, creating a relatively stable trading environment compared to more volatile pairs. The GBP/USD pair typically fluctuates less than 1% on an average daily basis.

As of February 5, 2024, the pair was quoted at 1.2585 dollars, within a 52-week range of 1.18030 to 1.31457, with an annual variation of 4.5%.

Recent dynamics of GBP/USD

The first week of February 2024 posed significant challenges for the pound, recording its largest weekly decline against the dollar since early December. This weakness originated after US employment data exceeded expectations, reducing the likelihood of imminent interest rate cuts by the Federal Reserve. The dollar’s momentum left GBP/USD in a weakened position, trading at 1.2562 dollars with a weekly decline of 0.66%.

The Bank of England’s meeting kept rates steady but adjusted its language regarding future monetary policy. Governor Andrew Bailey indicated that the bank is not close to implementing rate cuts. Markets anticipate four possible reductions of 25 basis points during the year, with a 50% probability that the first will occur in May.

Factors influencing GBP/USD

The quotation of this pair results from the interaction of various economic and political elements. Interest rates directly influence investment flows between the two currencies. Inflation, which measures purchasing power and price stability, is a key factor. Economic growth, monetary policies, employment performance, and trade balances significantly affect its value.

With interest rates at 5.5% in the US and 5.25% in the UK at the beginning of 2024, along with inflation rates of 3.4% and 4% respectively, the market carefully weighs these indicators. Geopolitical tensions in the Middle East and electoral uncertainty in the US add additional risk factors.

EUR/GBP: A comparison between two economic powers

EUR/GBP represents the value of the British Pound against the euro and combines two of the world’s major currencies. This pair ranks eighth in liquidity among all currency pairs, generating 3% of total Forex transaction volume. Its sensitivity to changes in monetary policy and geopolitical tensions is particularly pronounced.

The 52-week quotation range fluctuates between 0.84926 and 0.89832, showing an annual change of -4.54%.

Current dynamics of EUR/GBP

EUR/GBP is at a turning point, influenced by divergent monetary policies between the Eurozone and the UK. With the European Central Bank maintaining interest rates at 4.5% and the Bank of England at 5.25%, and inflation rates of 2.8% and 4% respectively, the market experiences caution combined with speculation.

Expectations that the ECB will implement more aggressive rate cuts than the Bank of England have been a key driver in the recent appreciation of the pound against the euro. Currently, the pair trades around 85.80 pence per euro, with a trend suggesting possible strengthening of the pound as markets internalize ECB adjustments and the Bank of England’s cautious stance on cuts.

Market expectations anticipate ECB rate cuts in March and an initial Bank of England adjustment in June 2024. Persistently higher inflation in the UK, along with forecasts to keep rates elevated longer, support the stability of the pound.

Factors influencing EUR/GBP

This pair reflects not only differences in interest rates but also the complex interaction of economic factors such as inflation and employment. Each economic announcement has the potential to cause significant fluctuations. Changes in employment figures and trade balances between Europe and the UK are fundamental, as shifts in unemployment rates or trade agreements alter investment dynamics and confidence in the respective currencies.

GBP/JPY: The high-volatility pair

GBP/JPY, known as “The Dragon,” represents the exchange rate between the British Pound and the Japanese Yen. This pair stands out for offering dynamic trading opportunities for investors seeking to capitalize on rapid market movements, characterized by high volatility.

As of February 5, 2024, GBP/JPY traded within a 52-week range of 157.394 to 188.957, with an annual variation of 17.28%.

Recent trends of GBP/JPY

Recently, GBP/JPY has shown an upward trend, driven by the relative strength of the UK economy and expectations of divergent monetary policies between the Bank of Japan and the Bank of England. Expectations of a more pronounced monetary easing cycle in Japan, compared to a more moderate stance by the Bank of England, have significantly influenced market sentiment.

The yen often acts as a safe-haven currency during periods of geopolitical uncertainty, such as recent tensions in the Middle East, which can contribute to increasing its value and pressuring the pound.

Factors impacting GBP/JPY

The value of this pair is affected by the Bank of Japan’s monetary policy, especially in efforts to intervene in currency markets to protect the Japanese export economy. Political and economic stability, energy prices, and extreme weather conditions also impact the yen, due to Japan’s dependence on energy imports.

Currently, Japan maintains interest rates at -0.1%, while the UK has 5.25%. Reported inflation rates are 2.6% for Japan and 4% for the UK, reflecting significant differences that drive movements in the pair.

GBP/CHF: Stability between two financial centers

GBP/CHF reflects the economic interaction between the UK and Switzerland, two major financial centers. This pair is widely traded as the British Pound and the Swiss Franc are respectively the fourth and sixth largest reserve currencies in the world. The CHF, Swiss currency, is renowned for its stability and represents the global private banking capital, with the highest per capita income worldwide.

The 52-week range fluctuates between 1.05577 and 1.15469, with an annual variation of -2.04%.

Current context of GBP/CHF

The British Pound shows notable firmness against the Swiss Franc in the current context. The Swiss National Bank has maintained comparatively lower interest rates, while the Bank of England holds a higher rate, supporting the strength of the pound. Inflation expectations in the UK indicate that rates could remain high for longer, providing continued support for the pound.

Swiss financial stability also continues to offer a safe haven during periods of global political and economic uncertainty, balancing the pair’s dynamics.

Factors influencing GBP/CHF

The value of this pair is sensitive to interest rates set by the Swiss National Bank and the Bank of England, as well as inflation rates in both countries. Bilateral trade, political stability, and Switzerland’s role as a private banking and safe-haven center during geopolitical uncertainty play significant roles in the valuation of the pair.

Investor outlook: Short-term and long-term strategies

In the complex landscape of currency markets, investors face various options when considering pairs like GBP/USD, EUR/GBP, GBP/JPY, and GBP/CHF.

For long-term investors, the consistency and economic stability of the UK are crucial. Considering that the British Pound has maintained a relatively strong position despite geopolitical uncertainties and economic challenges, it could be a solid choice for diversified portfolios aimed at extended time horizons.

For short-term investors, the volatility presented by GBP/JPY and GBP/USD, driven by differences in monetary policies of Japan, the UK, and the US, offers opportunities for speculative trading. Price fluctuations allow traders with derivatives instruments to capitalize on rapid movements, leveraging market uncertainty and reactions to economic announcements and monetary policy decisions, especially given the current divergences among central banks.

A clear understanding of the distinction between GBP and GBX, along with in-depth analysis of the factors driving these pairs, forms the foundation for making informed decisions in currency markets.