GBP/USD Profile
Introduction
Pound Sterling is the official currency of United Kingdom, divided decimally into 100 pence; it is the
world’s oldest currency that is still in use today. According to Encyclopaedia Britannica, the term
is derived from the fact that, about 775 silver coins known as “sterling’s” were issued in the Saxon
kingdoms; 240 of them being minted from a pound of silver, the weight of which was equal to the
later troy pound. Hence, large payments came to be reckoned in “pounds of sterling’s,” a phrase later
shortened to “pounds sterling.” Market participants nicknamed the cross as “the Cable” on account
of the fact that the rate was originally transmitted via a transatlantic cable that was used in the past to
synchronize the London and New York exchange markets. The pound sterling is the third largest reserve
currency and fourth most traded currency after USD, EUR and JPY. The Bank of England established
GBP as a paper money in 1694; Afterwards, the currency was pegged to the gold standard in 1816. It
moved away from the gold standard in 1931 due to the Great Depression. Under the Bretton Woods
system in 1940 the currency was pegged to the US$ at £1 = $4.03 till the end of World War II. In 1971,
the currency was floated. During the early eighties, the pound moved above the level of $2 level, mainly
due to a rise in interest rate. At its lowest, the pound stood at US$ 1.05 in February 1985 and by the
nineties it has pared back to US$1.66. In late 2004, the pound was worth US$1.94, but has fallen to mid
$1.70s as of July, 2005.
In the forex market, the GBP/USD pairs account for about 9% of the total volumes of transactions. The
pound has strengthened from $1.43 in June, 2010 to its current level at nearly $1.61 (as on 17 Mar’11)
underpinned by the Quantitative Easing Asset Purchase Programme of £ 200bn. The latest Monetary
Policy Committee kept the interest rates at 0.5%, however, the minutes revealed that some policy
makers were getting more worried about growth in the economy and thought that the chances of more
quantitative easing being needed had gone up. The minutes further stated that “‘the probability that
further action would become necessary to stimulate the economy and keep inflation on track to hit the
target in the medium-term had increased.’
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