GBP vs GBX: Understanding the difference and mastering trading in British pounds

What is GBP? The UK currency explained simply

The pound sterling (GBP) is the official currency of the United Kingdom, British Overseas Territories, and several dependencies. With the symbol £, this currency ranks fourth among the most valuable currencies in the world, currently trading around 1.2627 US dollars.

Historically, the pound sterling is the oldest currency still in circulation. Its significance in financial markets is undeniable: it accounts for approximately 20% of the total daily volume in the Forex market, ranking only below the US dollar, the euro, and the Japanese yen.

The Bank of England is the institution responsible for issuing banknotes and controlling monetary policy. Its direct performance influences the value of the pound, with factors such as inflation, economic growth (GDP), employment rates, and interest rate decisions playing crucial roles.

GBX what it is: The quote unit you should not confuse

Here comes a fundamental distinction that many novice traders overlook: GBX is the abbreviation for the penny, equivalent to 1/100 of a pound. While GBP represents the full pound, GBX is specifically used in stock markets.

Why does this difference matter? In UK stock markets, especially the London Stock Exchange, quotes are expressed in pence (GBX) instead of pounds (GBP). If a stock is quoted at 350 GBX, it means 3.50 pounds, not 350 pounds. This distinction prevents confusion and makes it easier to read prices of assets that often have high values.

Investors in UK securities should familiarize themselves with this nomenclature to interpret quotes correctly and execute orders without costly errors.

The dominance of GBP in the Forex markets

The Forex market operates 24 hours daily, allowing multinational companies and individual investors to exchange currencies constantly. The pound sterling is a key player in this scene.

Its relevance is clear: the UK is the sixth-largest economy in the world by GDP according to the World Bank. However, since the Brexit referendum in 2016, the pound has experienced turbulence. From a high of 1.43 against the euro in November 2015, the currency fell to 1.10 in October 2022, stabilizing at 1.1710 euros per pound in February 2024.

Macroeconomic factors impact it directly: interest rates at 5.25%, inflation at 4%, and a British economy facing challenges such as political instability, global energy crises, and geopolitical tensions.

Spreads: what you need to know before trading

In Forex, the spread is the difference between the bid and ask price of a currency pair. This concept is vital because it directly affects your profitability.

A low spread indicates high liquidity and lower transaction costs. Conversely, a high spread suggests lower liquidity and higher operational expenses. Pairs with higher trading volume, like GBP/USD, offer narrower spreads, making them more attractive for active traders.

GBP/USD: The “Cable” dominating daily transactions

GBP/USD is the third most traded currency pair internationally, representing 11% of the total market. Traders call it “Cable” for historical reasons, and over $330 billion are exchanged daily through this pair.

This massive liquidity translates into order executions in fractions of a second and low volatility (less than 1% on average daily). As of February 2024, the pair quotes at 1.2585 dollars, with a 52-week range between 1.1803 and 1.3146.

The current context is crucial: the pound faced its largest weekly decline against the dollar since early December after US employment data exceeded expectations. This reduced the likelihood of Federal Reserve rate cuts, strengthening the dollar and pushing GBP/USD to 1.2562.

Analysts anticipate four possible 25 basis point rate cuts by the Bank of England this year, with a 50% probability for May. This scenario of political and economic uncertainty underscores the importance of monitoring economic indicators from both countries.

EUR/GBP: When the euro and the pound face off

EUR/GBP ranks eighth in Forex liquidity, representing 3% of transaction volume. This pair reflects the relationship between two major European financial powers.

With the European Central Bank at 4.5% interest rates and 2.8% inflation, versus the Bank of England at 5.25% and 4% inflation, divergent monetary policies create interesting dynamics. The pound has shown relative strength against the euro, trading around 0.8580 euros per pound.

The market anticipates more aggressive rate cuts from the ECB (potentially in March) compared to a hesitant BoE to lower rates in the short term (first adjustment expected in June 2024). This expectation supports the pound, especially considering the persistent higher inflation in the UK that demands a more restrictive policy.

GBP/CHF: Meeting between two safe-haven currencies

GBP/CHF represents the relationship between the pound sterling (the fourth reserve currency in the world) and the Swiss franc (the sixth). Both are considered safe-haven currencies, which confers stability to the pair.

Switzerland, with its favorable regulatory environment for taxes, global private banking capital, and the fourth-highest per capita income in the world, offers financial solidity. The Swiss National Bank maintains relatively low rates (around 1.75%), while the BoE remains at 5.25%.

This interest rate gap, along with expectations that UK inflation will keep rates elevated for longer, sustains the strength of the pound against the franc. The pair traded in a 52-week range from 1.0558 to 1.1547, with an annual change of -2.04%.

GBP/JPY: Volatility and opportunities in “The Dragon”

GBP/JPY, known as “The Dragon,” is the most volatile of the mentioned pairs, offering dynamic opportunities for speculative traders.

With Japan maintaining interest rates at -0.1% (continuing stimulus policy) versus the BoE at 5.25%, this 5.35 percentage point gap generates significant movements. Divergent monetary policies are the main driver.

As of February 2024, the pair traded in a 52-week range from 157.39 to 188.96, with an annual variation of +17.28%. Recently, the trend has been upward, driven by yen weakness (potential easing cycle by the Bank of Japan) and relative British strength.

The yen often acts as a safe-haven during geopolitical uncertainty (such as tensions in the Middle East), adding complexity to predicting this pair. Short-term traders find volatility here to capitalize on quick movements.

Who should trade GBP?

Long-term investors: The UK’s economic resilience, despite recent challenges, keeps the pound as a solid diversification option. Its position as the fourth-largest reserve currency reflects institutional confidence.

Short-term traders: Pairs like GBP/JPY and GBP/USD offer enough volatility to capitalize on price movements. With CFDs, it’s possible to take advantage of rapid changes driven by economic announcements, monetary policy decisions, and market reactions to geopolitical events.

Technical traders: The high liquidity of GBP/USD provides the reliability and low spreads needed for technical analysis strategies, with orders executed without significant slippage.

Key factors moving GBP pairs

Monetary policy: Decisions by the Bank of England impact directly. Changes in interest rates, guidance from Governor Andrew Bailey, and future projections generate immediate movements.

Economic indicators: Employment data, inflation, GDP, and trade balance are constantly monitored by the market. The current high inflation environment (4%) keeps the BoE in a restrictive stance.

Geopolitical context: Tensions in the Middle East, developments in Ukraine, and global politics affect safe-haven demand, especially impacting pairs like GBP/JPY.

Interest rate differentials: The rate gap between the UK and other countries is a fundamental driver. Currently, the BoE’s advantage (5.25%) versus the ECB (4.5%) or the BoJ (-0.1%) influences specific dynamics in each pair.

Conclusion: Navigating the world of GBP with confidence

The pound offers diversified opportunities depending on your investor profile. Whether seeking long-term stability with GBP/USD and EUR/GBP, or speculative volatility with GBP/JPY, understanding the underlying dynamics is essential.

Don’t forget the distinction between GBP (the pound) and GBX (the penny) when investing in UK securities. Constantly monitor the Bank of England’s policies, economic indicators, and geopolitical developments. With low spreads on major pairs and guaranteed liquidity, GBP is an accessible gateway to the Forex market for traders of all levels.