Understanding the relationships between currencies is essential if you want to take ownership of your investments or are interested in global economics. As two of the most significant players in the financial world, the British pound and the U.S. dollar are naturally compared and contrasted regularly. Despite having a brief dip towards the end of 2022, the British pound has bounced back, much to the relief of many economists and financial investors. While episodes like this can represent an excellent opportunity for some, volatility at such a large scale is often seen as unfavourable. This article will examine why the British pound is more robust than the U.S. dollar and the key influencing factors.
British Pound and U.S. Dollar: A Brief History
Before getting into the technical details, we should look at the historical relationship between these two currencies. People who spend their time trading forex will be well aware of the importance of these currencies — they’re universally used and often parts of stable pairs, owing to how reliable they typically are.
The two countries share a unique relationship, which is one of the main reasons why their currencies are often of such high interest to others. When we think of economics, we often think of Great Britain and the United States, owing to the two being among the most influential on the world stage, which is why it’s so popular among traders.
Historically, the British pound has been considered the gold standard of currencies, being stronger than almost all others, including the U.S. dollar. The British pound was worth twice as much as the U.S. dollar as recently as 2007. Although things have changed over the past few decades, the British pound is still ahead by a significant margin.
The Brexit Factor
When the British public voted to leave the European Union in 2016, it sent shockwaves across the globe, including those involved in finance and economics. Regardless of your voting history or views concerning Brexit, we can all agree there has been a high amount of volatility since, which we’re unlikely to see the end of as of February 2024.
Within 24 hours of the votes being finalised, the British pound was down 8%, further hurting international confidence in Great Britain’s ability to compete globally. While the British pound stayed ahead of the U.S. dollar, this reduction in value was a sign of investors pulling back their commitment in light of the challenges now on the horizon.
The years since can be characterised as being turbulent at best. By the end of 2016, the British pound dropped to $1.20, and while there was a brief resurgence in 2018, reaching a peak value of $1.40, it was clear that the days of a 2:1 valuation were long gone. Following Liz Truss’s short and disastrous stint as Prime Minister, during which time the policies effectively crashed the United Kingdom’s economy, we saw the British pound plummet to $1.08, spiking genuine fears of recession.
So, Why Is the British Pound Still Considered Stronger?
The value and strength assigned to these two currencies will depend on how you view them and what factors you consider most significant. At face value, the British pound currently worth $1.25 U.S. dollars indicates that the British pound is more robust, but that ignores the global impact of the U.S. dollar and the fact that it is considered the world’s reserve currency, adding credibility.
London is seen by many as the world’s financial capital, and while New York City is a powerhouse in its own right, London is still the clear leader. This adds confidence in the British pound as investors know that as bad as things get, London is relatively insulated due to its strong connectivity and ability to weather even the worst economic storms. While there are exceptions, London is the anchor to which the British pound is attached.
This issue, as you would expect, is much more complex than one being stronger than the other. However, there are a handful of factors that can have a significant impact on the value of the British pound when compared to the U.S. dollar, including:
- US Federal Reserve policy changes.
- Bank of England policy changes.
- Inflation rate and its impact on interest rates.
- Employment figures and governmental policies.
- Geopolitical events, economic indicators, and industrial production.
Why Is This Important?
If you want to get more involved in trading, understanding how the British pound and the U.S. dollar are connected is essential. Even if you aren’t interested in trading or making investments, this is important to understand, primarily because of how much it can impact your daily life. So, the next time you see a significant event in the news, take some time to check how this has affected this unique currency pair and try to apply this in the future to predict further changes.