GBX vs GBP: Keys to understanding the British monetary units in currency markets

Why do investors confuse GBP and GBX?

In global financial markets, especially in Forex, it is common to encounter two codes that can cause confusion among traders: GBP and GBX. While GBP represents the British Pound Sterling, the official currency of the United Kingdom, GBX is the abbreviation for the penny, equivalent to one hundredth of a pound (1/100). This distinction is particularly critical in stock markets, where British shares are often quoted in pence, which is why the notation GBX is used to clearly differentiate between the two units.

The British Pound Sterling, with its code GBP, ranks as the fourth most valued currency worldwide, with an approximate exchange rate of 1.2627 US dollars per pound in recent dates. Its relevance in international markets is undeniable: it accounts for about 20% of all daily Forex operations, ranking only behind the US dollar, the Japanese yen, and the euro.

The British Pound Sterling: a historic currency with contemporary influence

The United Kingdom, ranked as the sixth-largest economy in terms of GDP, has seen its currency undergo significant transformations after the Brexit referendum in 2016. Since that event, which marked the beginning of a period of economic and political uncertainty, the pound has shown considerable fluctuations against other major currencies.

As a historical reference, the GBP/EUR pair reached highs of 1.43 in November 2015, but since July 2016 has remained below the 1.2 threshold, touching lows of 1.10 in October 2022. As of February 5, 2024, the quote was at 1.1710 euros per pound, reflecting the inherent volatility of this post-Brexit period.

It is noteworthy that the Bank of England (BoE) acts as the official issuer of banknotes and defines monetary policy for the British Pound. Its governor, Andrew Bailey, has indicated that markets potentially anticipate four 25 basis point cuts during 2024, although such a move is not yet considered imminent. This stance contrasts with speculation about divergent monetary policies between the UK and other developed economies.

Economic factors shaping GBP value

The value of the pound responds to multiple macroeconomic variables. Inflation rate, interest rates set by the Bank of England, GDP performance, and employment reports directly impact its quotation. In early 2024, the UK registered an inflation rate of 4% with interest rates of 5.25%, creating a cautious environment for investors.

The increased volatility that has characterized the pound in recent years reflects the currency’s sensitivity to changes in the economic and political landscape both domestically and internationally. Factors such as domestic political instability, fiscal policy impacts, the global energy crisis, and geopolitical tensions, especially in the Middle East, have contributed to sharp movements in its value.

The universe of currency pairs linked to GBP

In the Forex market, which operates 24 hours daily facilitating transactions for multinational companies and speculative investors, currency pairs measure the value of one currency relative to another. For those trading the British Pound, there are main combinations offering different risk and return profiles.

A fundamental concept in Forex trading is the spread, which represents the difference between the buy and sell price of a currency pair. This indicator reflects both market liquidity and inherent transaction costs: a low spread indicates high liquidity and lower operational costs, while high spreads may indicate the opposite. Investors should carefully consider these costs, as they directly affect the final profitability of their investments.

GBP/USD: The “Cable” of the currency market

GBP/USD is the third most traded currency pair internationally, representing about 11% of total Forex transaction volume. Commonly known as trading the “Cable,” this pair records daily exchanges of $330 billion, generating exceptional liquidity that allows buy and sell orders to be executed in fractions of a second.

This abundance of liquidity results in lower overall volatility: the GBP/USD pair fluctuates less than 1% on average daily, offering a relatively more stable trading environment compared to other pairs. As of February 5, 2024, it was quoted at 1.2585 dollars with a 52-week range between 1.18030 and 1.31457, accumulating a 12-month variation of 4.5%.

Recently, the pound faced pressure in early February after US employment data exceeded expectations, reducing the likelihood of imminent rate cuts by the Federal Reserve. This scenario strengthened the dollar, positioning GBP/USD in a weaker situation, with weekly declines of 0.66% and quotes at 1.2562 dollars.

Interest rates of 5.5% in the US versus 5.25% in the UK, along with inflation rates of 3.4% and 4% respectively, create a scenario where the market carefully weighs these macroeconomic indicators. Geopolitical tensions and US presidential election prospects add additional layers of uncertainty.

EUR/GBP: Divergences in monetary policy

The EUR/GBP pair, ranking eighth in liquidity and accounting for 3% of total Forex volume, reflects the interaction between two of the world’s major currencies. With a 52-week price range between 0.84926 and 0.89832, it has experienced an annual change of -4.54%, showing the pound’s appreciation against the euro.

The current scenario for this pair is marked by significant divergences in monetary policy. The European Central Bank maintains rates at 4.5% compared to 5.25% for the Bank of England, with inflation rates of 2.8% and 4% respectively. The possibility that the ECB will implement more aggressive rate cuts than the BoE has been a key driver behind the recent strength of the pound against the euro.

The pair moves around 85.80 pence per euro, with trends suggesting a possible strengthening of the pound as markets internalize the ECB’s adjustment policies. Current expectations anticipate ECB rate cuts in March and an initial BoE adjustment in June 2024, although persistently high inflation in the UK supports the outlook for more prolonged restrictive monetary policies.

GBP/CHF: Stability versus dynamism

The GBP/CHF pair represents the interaction between two major financial centers with global reserve currencies. The pound ranks fourth, while the Swiss franc is sixth. With a 52-week range between 1.05577 and 1.15469 and an annual variation of -2.04%, this pair is characterized by its relative stability.

The Swiss franc, currency of a nation with the fourth highest per capita income in the world and an extraordinarily favorable fiscal regulatory environment, maintains its role as a safe haven during periods of uncertainty. Currently, the Swiss National Bank has kept rates comparatively lower than the Bank of England, supporting the strength of the pound. Expectations that the UK will maintain high rates for extended periods continue to support the British currency, while Swiss financial stability continues to offer protection during geopolitical volatility.

GBP/JPY: The “Dragon” and its trading opportunities

Known as “The Dragon,” GBP/JPY stands out for its high volatility, offering dynamic opportunities for traders seeking to capitalize on rapid market movements. As of February 5, 2024, it traded within a 52-week range of 157.394 to 188.957, with a 17.28% annual variation, significantly higher than other pairs analyzed.

Recently, it has shown an upward trend, driven by the relative strength of the UK economy and expectations of divergent monetary policies. The Bank of Japan maintains rates at -0.1% compared to 5.25% in the UK, with inflation rates of 2.6% versus 4% respectively. The anticipation of a more aggressive monetary easing cycle in Japan, contrasted with the measured stance of the Bank of England, has significantly influenced market sentiment. Additionally, the yen often acts as a safe-haven currency during geopolitical tensions, a factor that can contribute to observed volatility.

Strategies for investors based on time horizon

For long-term traders, the consistency and economic stability of the UK present solid arguments. Considering that the British Pound has remained relatively resilient despite geopolitical uncertainties and economic challenges, it is a viable option for diversified portfolios seeking exposure to currencies of developed economies.

For short-term traders, the volatility present in GBP/JPY and GBP/USD, driven by differences in monetary policies between Japan, the UK, and the US, creates significant speculative opportunities. Price fluctuations allow traders with derivatives instruments to capitalize on rapid movements, taking advantage of market uncertainty and reactions to economic announcements and monetary policy decisions.

Spreads vary significantly: pairs like GBP/USD and EUR/GBP, with higher liquidity, offer low (attractive spreads), while pairs like GBP/CHF have higher spreads due to relatively lower liquidity.

Final considerations for traders

In the complex landscape of currency markets, understanding technical differences such as the one between GBP (libra esterlina) and GBX (penny sterling)@ is fundamental, especially for those trading British assets. The pound continues to navigate between volatility and opportunities, shaped by macroeconomic factors, monetary policy decisions, and geopolitical realities that require constant monitoring.

Staying vigilant regarding economic indicators, interest rates, and geopolitical contexts allows investors to make informed decisions about their positions in currency pairs linked to GBP, potentially optimizing their returns across different market conditions.