Can Dollar-Pound (GBP/USD) Exchange Rate Reach Parity?
British pound closed at its lowest price against the US dollar in more than 30 years on Tuesday, September 6, 2022, as GBP/USD now flirts with lows unseen since 1985.* Though the pound has never reached parity – the state of equality between two currencies resulting in a foreign exchange rate of 1.0000 – with the dollar in the recorded history of the pair, dollar-pound parity could be in the future.
Historical GBP/USD Prices (Daily 1/1/22 to 9/8/22)
Why is British Pound (GBP/USD) Falling?
Inflation has caused most central banks to raise interest rates in an attempt to calm rising asset prices – higher interest rates make borrowing money more expensive thereby slowing demand and driving prices lower, theoretically. The US has been more aggressive than most major economies, including the United Kingdom and Eurozone, in hiking rates, which can be reflected in the current premium of more than 0.5%, or 50 basis points, US over UK short-term rates. †
Historical GBP/USD Prices (Monthly 1/1/00 to 9/8/22)
Given this current correlation between inflation and US dollars, a further increase in inflation could send major currencies like the GBP even lower against USD. The British currency once worth double that of the United States is now at risk of falling under $1.
What Are the Chances of Dollar-Pound (GBP/USD) Exchange Rate Parity?
Historically speaking, the chances of parity for the GBP/USD pair are nil given that there’s no known instance of it occurring. Derivatives markets, however, are quoting a 6% chance of the pound descending below parity with the dollar by the start of 2023.‡
When GBP/USD traded lower in the past, those low prices did not last long. For example, when the pound traded at its all-time lows against the dollar in 1985, it spent less than a year under 1.2000; more recently, the downside seen in the pandemic’s early days produced less than a month of sub-1.2000 prices.
GBP/USD Trading Takeaways
• GBP/USD has not traded parity – 1.0000 – in the recorded history of the pair
• GBP/USD is currently closest to parity since 1985
• 6% chance of GBP/USD parity by 2023
• GBP/USD has not tended to stay low for long in its history
*Lowest price since 1985 (Source: https://www.macrotrends.net/2549/pound-dollar-exchange-rate-historical-chart)
†Bank of England and US Federal Reserve rates as of 9/8/22 (Sources: https://www.bankofengland.co.uk/ and https://www.federalreserve.gov/)
‡Probabilities derived from British Pound Futures Options expiring 1/6/23 as of 9/9/22 (https://www.cmegroup.com/)
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