How the United States lost its currency strength

Key points

• GBP/USD is currently trading above 1.2600 - far from 2022 lows near 1.0500
• Concern for further dollar weakness grows as interest rates expect to lower in 2024
• GBP/USD has traded above 2.0000 in the past 20 years, giving historical precedent for further rallies

Interest rate markets cause fear of future dollar weakness

In the last couple of years, the United States has experienced a significant shift in its currency strength, marking a departure from the previous decade. The unprecedented strength of the U.S. dollar has given way to a period of weakness, leaving traders wondering if this is a sustained decline or just a temporary blip.

One of the key factors contributing to the weakening of US dollar is the decrease in inflation expectations. Unlike the previous year, where inflation was high and the Federal Reserve had to raise interest rates, the current lowering inflation environment has reduced the need for aggressive rate hikes. In fact, there is even speculation of a rate cut as soon as March, per the CME FedWatch tool. This shift in interest rate expectations can already be seen in the decline in the 10-year Treasury yield, which has dropped from 5% to 4.3%.

GBP/USD historical price history

Looking back at the historical relationship between the pound and the dollar, it becomes clear that the recent rally of the pound against the dollar is significant. While the pound is still far from historical highs, the Bank of England's aggressive rate hikes and the relative strength of the UK economy have contributed to the pound's resurgence. Once trading near 1.0500 in late 2022, GBP/USD is back above 1.2600. Over a 30-year horizon, the pound has gotten as high as 2.1000 against the dollar and spent the majority of its time above 1.4000.

However, it is important to note that this weakness could be temporary. If interest rates abroad lower before the US, the dollar could regain its strength. It is important for traders to closely monitor these factors to navigate the current market conditions. The volatility in the currency markets presents both opportunities and risks, and staying informed is crucial for successful trading.

How to trade GBP/USD

1. Open an account to get started, or practice on a demo account
2. Choose your forex trading platform
3. Open, monitor, and close positions on GBP/USD

Trading forex requires an account with a forex provider like IG. GBP/USD can be found in IG's platform under the 'Major' pairs tab. Many traders also watch major forex pairs like EUR/USD and USD/JPY for potential opportunities based on economic events such as inflation releases or interest rate decisions. Economic events can produce more volatility for forex pairs, which can mean greater potential profits and losses as risks can increase at these times.

You can help develop your forex trading strategies using resources like IG’s Trading Academy. Once your strategy is developed, you can follow the above steps to opening an account and getting started trading forex.

Your profit or loss is calculated according to your full position size. Leverage will magnify both your profits and losses. It’s important to manage your risks carefully as losses can exceed your deposit. Ensure you understand the risks and benefits associated with trading leveraged products before you start trading with them. Trade using money you’re comfortable losing.