The Great Britain Pound, or Pound Sterling (the “GBP” or “pound”), is the official currency of the United Kingdom and most of its territories. The GBP is ranked fourth in global foreign exchange market turnover after the USD, Euro, and Japanese yen. It also ranks third as a component of global currency reserves after the USD and Euro.

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GBP History

The origins of the British pound can be traced to approximately the middle of the 8th century, when silver pennies weighing 1/240th of a pound were introduced as a standard currency by an Anglo-Saxon king. Over the centuries, the amount of silver in a pound was reduced, and in 1663, Britain began to use gold currency in addition to silver. The gold standard was extended to paper money which was introduced in the late 1600s.

Britain continued to use the gold standard, or some value pegged to gold, until 1931, when the pound was floated. However, an agreement with the United States pegged the value of the GBP to the dollar, an arrangement which was solidified by the Bretton Woods system. The GBP was again floated in the early 1970s until 1990, when the pound became part of the European Exchange Rate Mechanism (“ERM”). Britain infamously withdrew from the ERM in 1992 as a result of pressure from currency speculators, as well as other fundamental difficulties with the ERM. The GBP is now freely floated.

Current Status

The GBP has been growing steadily as a proportion of global currency reserves (from 2.1% of total reserves in 1995 to 4.7% in 2007). In fact, after Britain withdrew from the ERM, it found a new age of economic and political stability, leading to a gradual increase in value and relatively high interest rates compared to major currencies. This stability also appeals to carry trade investors, who see the GBP as a stable high yield proxy for the Euro.

Future Outlook

At present, many believe that the GBP is overvalued compared to the USD, since the pound has not yet shown a major correction against the dollar despite recent troubles in Britain’s economy. But long term trends are difficult to predict. Britain’s economy is unique in that it is a major trading partner both of the EU and the US, so its currency value is not constantly related to the Euro or the USD. This leads to unpredictable cycles. Britain’s inflation rate is also an issue that will continue to hamper its joining the Eurozone, and which will be a constant factor for currency value.

Other Currencies:

The Yen
The Swiss Franc
The US Dollar
The Euro

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