Why the British Pound Is Stronger Than the U.S. Dollar (2024)

Historically, the British pound (GBP) has been stronger than most currencies, including the U.S. dollar. In 2007, the value of the GBP hit a record doubling the value of the U.S. dollar. As of 2024, the British pound is the fourth strongest currency in the world, maintaining a steady value of over 1.20 USD.

The value of the British pound is explained by a combination of factors, like interest rates, inflation, and the overall state of the economy. The strength of the GDP is driven mainly by the fact that the Bank of England, which issues the currency, has played an active role in international economic developments.

However, in recent years and especially since Brexit, the GBP has weakened due to higher interest rates and fear of a recession, while the U.S. dollar has strengthened.

Key Takeaways

For more than 20 years, the British pound has been stronger than the U.S. dollar in nominal terms.
Brexit weakened the British pound on a structural level.
Lack of market confidence in both the government of then-U.K. Prime Minister Liz Truss and Trussonomics further weakened the pound.
The jettisoning of the Truss tax cuts by Jeremy Hunt, the current Chancellor of the Exchequer, seems to have stabilized markets and consequentially halted the decline of the pound.

A Brief History of the U.K. Pound (GBP) vs. the U.S. Dollar (USD)

Before World War II, and arguably before World War I, the British pound (GBP) was the primary medium of foreign exchange, giving it a nominal premium over other currencies including the U.S. dollar (USD), with a pound (£1) fetching $5 and more. After WWII, however, the USD began its rise to become the preeminent currency in international trade and a global store of value.

For example, as of the end of 2022, the USD comprised 58% of global foreign exchange holdings. Starting from those lofty valuations, the USD began to supplant the GBP, leading to a long slide in the GBP/USD rate over the succeeding decades.

The British pound (aka the sterling) has been nominally stronger than the USD for most of the past few decades, making a high of just over 2.00 USD per GBP around the time of the Great Financial Crisis (GFC) of 2007–2009. The GFC saw investors flee to the USD and out of the pound, among other major currencies. Once the GFC dust had settled, the GBP dropped to the 1.40–1.45 level. The GBP weakness was more a case of panic buying of the USD than any GBP-negative issue, as other major currencies weakened sharply against the USD as well (see long-term chart below).

Why the British Pound Is Stronger Than the U.S. Dollar (1)

In subsequent years, GBP/USD fluctuated between roughly 1.40 and 1.70, but then came Brexit in June 2016, when the United Kingdom surprisingly voted to leave the European Union (EU). The pound was knocked down virtually overnight from the 1.40–1.45 area to the 30-year low of 1.32, where it remained until recent events and market dislocations.

The culprit this time is a combination of factors, chief among them USD strength due to widening interest rate differentials in the USD’s favor. Along with higher relative interest rates, the U.S. economic outlook is reasonably positive, while market watchers are soon to declare the U.K. is in or near recession. The pound is not alone in being sold against the USD, as investors fear a global recession and favor the greenback as a safe haven in times of economic distress.

Nominal Value vs. Relative Value

The nominal value of a currency is relatively arbitrary. What matters is how the value of that currency changes over time relative to other currencies. For more than 20 years, one U.S. dollar has been worth less than one British pound.

Consequences of Brexit

On June 23, 2016, British citizens went to the polls and voted in favor of a referendum to leave the EU, of which the country had been a member since 1973. The Brexit, or British exit, came about as a result of a populist movement that had grown weary of ceding control of laws andregulations to outside forces in Brussels.There was also a fear of the effects of what was viewed as unchecked immigration. Economists, most of whom were confident that Britain would vote to remain in the EU, warned of economic consequences that would result from Brexit.

The vote in favor of Brexit shocked oddsmakers and roiled world markets. It also had an immediate and pronounced effect on the British pound, which declined in value by more than 8% in the 24 hours following the vote. This is another example of relative value trumping nominal value. While the pound remained stronger than the dollar innominalterms, investors still abandoned the currency, citing its precipitous decline in relative value.

The pound has been turbulent and volatile since the 2016 Brexit announcement. Near the end of 2016, the GBP/USD reached lows of around 1.20. There was a slight rebound in 2018, peaking at around 1.40 in April of that year. Most recently, the sterling was trading roughly 1.2588 against the buck, owing to concerns over global growth, the risks of a U.K. recession, and interest rate differentials vastly in favor of the USD. Market speculators may very well make a test of parity (1 GBP to 1 USD) and even lower, potentially giving the USD a nominal value above the GBP.

Why Has the British Pound (GBP) Maintained a Nominal Premium to the U.S. Dollar (USD) for All These Years?

Much of it has to do with the starting point of GBP/USD more than a century ago. The sterling has been in a long downward slide against the greenback for many decades, owing to the USD’s rise to prominence, the growth of its economy, and GBP negatives, such as Brexit and a widening interest rate gap against the sterling, to name a few current factors. The nominal premium is not carved in stone, and speculative and macroeconomic developments may soon see the pound give up its nominal premium.

Does It Matter If GBP/USD Falls Below Parity?

It would certainly be a blow to the United Kingdom’s ego, but it won’t make a significant change to global currency valuations. A weaker pound is a double-edged sword for the U.K.: A weaker currency is good for exports, which can bolster the economy, but a weak currency is also a driver of inflation (imports are more expensive), which the Bank of England (BoE) is legally obliged to contain. The risk is that a downward move in GBP/USD could become disorderly, for which the U.K. would need outside help (think the Group of Seven [G-7]) to contain or slow the decline.

Which Is More Important to the GBP: Nominal Value or Relative Value?

A weak pound is a nominal construct as far as exchange rates go. However, if the sterling is seen to be diverging from other currencies as well—i.e., its relative value is falling across the board—it could provoke a run on the GBP, with speculative sellers as the driving force behind that selling.

The Bottom Line

The British pound (GBP) has enjoyed a nominal premium to the U.S. dollar (USD) for many years, owing both to historical convention and the Bank of England’s willingness to intervene in times of crisis to defend the pound. The resignation of Kwasi Kwarteng as Chancellor of the Exchequer and the subsequent collapse of the Liz Truss government seem to be acting as a stabilizing influence on the GBP. The sterling now appears to be holding steady, with the exchange rate at $1.26 USD to £1 GBP as of April 2024.