For centuries, it has been The British pound has a token advantage over the US dollar. While it is something that has simply been a reality throughout everyone’s life, it is important to understand the reasons why the British pound is stronger than the US dollar.
We look at this, as well as the implications for this relationship between the two currencies going forward.
History of the British Pound and the US Dollar
The British pound has been stronger than the US dollar since before Modern currency markets seem.
Turn the clock back more than 100 years, and The British pound was the common medium for foreign exchange. Before the two world wars, this was the currency that most other countries used as a reference point and, as a result, had a premium on it.
At some point before World War II, the British pound was worth more than $5—simply because, at this point in history, Britain was the dominant global economy.
But, After World War II, the United States began to evolve into the global superpower What is it today.
As a result, a shift occurred that made the US dollar the main form of foreign currency for other countries, replacing the British pound. Today, More than 60% of forex holdings are in US dollars.
Understanding nominal strength versus relative strength in a currency
The replacement of the pound sterling with the US dollar has led to a steady decline in the relative strength of the pound sterling in stock markets.
Starting from its highest level above $5, over the past decades, the The British pound fell to around $1.20 At the beginning of 2023. With this decline, it is important to understand the difference between Nominal and relative strength.
While the British pound Nominally stronger than the US dollar—Order more than one worker — It is Not necessarily always relatively strong.
Related “ How to trade the British pound against the US dollar
There is an argument to be made for that The US dollar, in fact more powerful of the British pound in a relative sensegiven that the trend over the past two decades has been a weakening of the pound sterling.
As a result, many punters are looking to trade the British pound against other currencies instead. One example of this is the growing popularity of the pound sterling in the Canadian dollar market. Part of this is because it is easy to learn How to trade the GBP/CADand often yields a better yield.
The impact of Brexit on the future of the pound sterling
Some market analysts predict that with the impact of Brexit and unfavorable interest rates, the British pound will soon give up its nominal advantage over the US dollar.
When Brexit happened in 2020, the British pound fell from the $1.40 to $1.70 range, all the way down to $1.20 overnight. the The currency relationship has not recovered Since then, with day traders taking advantage of swing lows as low as $1.10 recently.
While a drop for the British pound below $1.00 would certainly be historic, It will have little impact on the overall economy. What matters is whether the pound sterling also weakens against other currencies, and the strength of the US dollar.