A Special Relationship: the Pound-Dollar History
Reading time: 10 minutes
The GBP vs. USD history is a long one, as rich and interesting as any currency pair you care to name. Trade has been going on between these two currencies for so long that there is no way to state any kind of value for an original Pound to Dollar exchange rate. A large portion of the historical FX (Forex) rates between the two currencies has been governed by the gold standard.
This isn't unique to Pound Sterling and the Dollar, of course. The gold standard casts a long shadow over a wide range of historical foreign exchange rates. The modern concept of the GBP/USD exchange rate didn't really begin until the early 1970s, in fact. This was when both the US and the UK moved to floating exchange rates.
Prior to 1971 and dating back to the tail-end of World War II, the FX rate history of the Pound and other Allied nation currencies was effectively pegged to the value of gold. This was one of a number of agreements established at the Bretton Woods Conference in 1944, an event that governed the Dollar to Pound exchange rate history for close to three decades.
GBP to Dollars History Post-Bretton Woods
After the fall of Bretton Woods, GBP/USD currency conversion history took on a much more varied shape. In the 1980s alone, the FX currency pair fluctuated over quite dramatic ranges. There are a lot of factors affecting the exchange rate, of course. It is interesting how often major moves can be reduced to one or two predominant influences. The early 1980s makes a fascinating case study. If we rewind the clock back to 1985, we can see a number of interesting events:
- The first British mobile phone call was made
- British scientists conducting a survey in the Antarctic discovered a hole in the ozone layer
- The miners' strike ended
- GBP/USD reached 1.05
This is the lowest historical exchange rate for the pair. If we rewind the clock further, we see that the rate increased all the way up at 2.44. So what happened in the US Dollar to GBP exchange rate history to cause such a change over a span of just five years? Well, the 1980s began with the US economy in a long-standing state of malaise. Energy shortages and the rise of OPEC in the 1970s saw prices in general, and oil in particular, spiralling upwards.
Simultaneously, the scarcity of oil hindered the economy's output. This combination of stagnation and inflation (or stagflation), wasn't unique to the US, but inflation was especially steep and persistent there. The country also suffered from high unemployment and the aftermath of its war in Vietnam, while the FED (Federal Reserve) failed to implement the changes to its monetary policy, which were necessary to address the high inflation.
Change at the FED was on its way though. In the summer of 1979, President Jimmy Carter appointed Paul Volcker as Chairman of the Federal Reserve. The changes didn't stop there: by 1981, Carter was gone and Ronald Reagan took the position. Along with him came 'Reaganomics'. One of the pillars of this new economic policy was high interest rates to curb inflation. Under Volcker's leadership, the FED hiked the federal funds rate by 20%.
This wasn't painless: unemployment climbed above 10% amidst another recession, but inflation fell back. Later, when inflation was back under control, the FED was able to ease a little. This, combined with the expansive tax cuts and large military spending of the Reagan administration, eventually saw the economy booming, and the Dollar with it. By 1985, the US dollar had risen 50% against the other leading currencies of the period. International trade and foreign exchange rates are connected, of course.
The strength of the Dollar was a huge hindrance to the US industry, which was unable to price itself competitively against foreign competition. This led to the Plaza Accord: an orderly devaluation of the Dollar undertaken by the central banks of France, Germany, Japan, the US, and the UK. Central bank factors that affect exchange rates are not always as orderly as this, as we shall see.
Something's Got to Give: the UK, the ERM, and Black Wednesday
Despite governments moving to floating exchange rates in the early 1970s, certain governments intermittently intervened in the FX market, in order to variously defend or weaken their currencies, as the Plaza Accord shows. Countries with export-oriented economies, such as Japan, have been known to devalue their currencies in order to boost the export market.
The Bank of England (BoE) intervened heavily in the early 1990s. Its intervention misadventures led to one of the most dramatic moves ever witnessed in the Pound to Dollar exchange rate history. Here's some early 90s background: the UK government was committed to maintaining the Pound's value against the German Deutschmark as part of the Exchange Rate Mechanism (ERM).
This led to the Bank of England having to actively prop up the value of Sterling. It did this by buying the currency and raising interest rates. But here's the kicker: at the time, the UK economy was enduring a recession. Raising interest rates was consequently an inappropriate monetary measure. Something had to give.
A large number of speculators, most notably George Soros, recognised the shaky position of the BoE and began shorting the pound. On Black Wednesday, 16 September 1992, Britain left the ERM and ditched the idea of supporting the Pound. Releasing the floodgates had a devastating impact on Sterling's value.
It sank 25% against the Dollar in a day, in one of the most dramatic moves ever seen in the pound to dollar history. The price continued to move lower all the way into early 1993. You can read more about this in our article discussing the Top Three Most Successful Forex Traders Ever.
Anatomy of a Crisis: GBP to USD History 2008 - 2009
The prelude to the global depression of 2008 to 2009 was of course the sub-prime crisis. The sub-prime crisis began to simmer in early 2007, reaching boiling point by the summer. By this time, it was clear that several major US financial institutions were in real trouble, but the global reach of the problem was not yet fully apparent.
Consequently, the GBP to Dollar exchange rate rose for much of 2007, a response to the seeming relative weakness of the US economy. This culminated in GBP/USD reaching 2.1163 in November 2007, the highest level seen in the historical currency exchange rate since 1980.
Once the Bank of England realised the extent of the contagion, however, it was forced to make drastic changes from 2008 onward. By early 2010, the BoE had increased the ratio of its balance sheet relative to GDP almost threefold compared to pre-crisis levels. The table below lists key events in the Dollar to Pound history between 2008 to 2009:
8 October 2008
The BoE cuts its Bank Rate by 50 basis points to 4.5%
6 November 2008
The BoE cuts the Bank Rate by 150 basis points to 3.0%
4 December 2008
The BoE cuts the Bank Rate by 100 basis points to 2.0%
8 January 2009
The BoE cuts the Bank Rate by 50 basis points to 1.5%
5 February 2009
The BoE cuts the Bank Rate by 50 basis points to 1.0%
5 March 2009
The BoE cuts the Bank Rate by 50 basis points to a record low of 0.5% and announces quantitative easing
GBPUSD historical data shows a clear correlation between the ultra-loose monetary policy of the UK, and the weakness of its currency. When we look at the currency rate by date, we can see a progressive decline in the value of the Pound, as monetary policy became increasingly accommodative.
Brexit Makes its Mark in the US Dollar to GBP Exchange Rate History
Jumping forward to 2016 brings us to the Brexit vote. We can see from the historical data from that period just how pronounced the effect of the leave vote was on the the value of the Pound. The Brexit vote saw GBP breaching lows not seen in over 30 years of Forex historical data. In fact, it was the weakest the Pound-Dollar rate has been since the low from 1985. The crucial difference is that in the 1980s it was more about Dollar strength, whereas the move in June 2016 was all about Sterling weakness.
There is still a great deal of uncertainty over Brexit. To some degree, there is still a question mark hanging over whether the UK will leave at all. It therefore illustrates the impact of positioning and market sentiment ahead of actual change in the fundamentals.
The Sterling Flash Crash
There was a steep move down that occurred in the markets on 7 October 2016. This was the so-called 'Sterling flash crash' that made all sorts of GBPUSD Forex news headlines. The Pound moved 6% lower against the Dollar in just a matter of minutes. The decline came at a tense time for the Pound, of course, with talks of a hard Brexit that might see the UK leave the single market.
The exact causes of the move are debatable. Some have suggested a domino effect of stops being hit, while others have surmised it was algorithmic trading gone wrong. The suddenness of the move, and the equally sudden recovery does suggest some element of automation at play, but there can be little doubt that the conditions were already in place to spook the market.
Perhaps the biggest lesson to take away from this is: is that there was no way to forecast GBP/USD moving in this manner. Trading is about dealing with uncertainty. A large part of the skill is how you deal with the unexpected. This remarkable event shows how important it is to always maintain good money management. The best way to find out how you react to the vagaries of the market is to practice using a demo trading account. This allows you to trade real live market prices, without risking a penny.
Conclusion: GBP Dollar Exchange Rate History
We've seen a variety of examples of factors affecting currency rates, including:
- Fiscal policy
- Monetary policy
- Political change
- Algo-trading in a trending, edgy market
It wasn't just the causes behind the moves that varied though. The timeframes were dramatically different. It's worth thinking about how you might have dealt with each different case. Additionally, if you are considering trading, or are already trading with MetaTrader, you can get even better tools for customizing your charts with the MetaTrader Supreme Edition plugin for MetaTrader 4 and MetaTrader 5. As well as offering an innovative freehand drawing tool, it comes with a variety of indicators and cutting-edge tools for professional traders.
This material does not contain and should not be construed as containing investment advice, investment recommendations, an offer of or solicitation for any transactions in financial instruments. Please note that such trading analysis is not a reliable indicator for any current or future performance, as circumstances may change over time. Before making any investment decisions, you should seek advice from independent financial advisors to ensure you understand the risks.