Recently, someone asked me why the British pound has risen, so I thought I’d take some time to organize the story of the pound over these past few years.

Speaking of the pound, many people might think it’s just a traditional old currency, nothing special. But in reality, if you’ve really observed its trend over the past decade or so, you’ll find that the pound is almost a highly emotional trading asset — it reacts very sensitively to politics, economics, and interest rates.

First, let’s talk about the characteristics of the pound itself. As the fourth most traded major currency in the world, the pound accounts for about 13% of daily trading volume in the forex market, second only to the US dollar, euro, and Japanese yen. The GBP/USD currency pair is the most watched, with high market liquidity. But because of its liquidity and volatility, it’s especially susceptible to political shocks.

I reviewed the trend over the past ten years and found several clear patterns. In early 2015, the pound was still high at around 1.53, seeming stable. But after the Brexit referendum result in June 2016, the pound plummeted to about 1.22 that night, marking the largest single-day drop in decades. This drop made the global markets realize: the pound is extremely sensitive to political uncertainty.

Later, in 2020, with the pandemic hitting hard and the UK’s long lockdowns, the pound briefly fell below 1.15. By 2022, the new Prime Minister’s “mini-budget” triggered market panic, causing the pound to crash to a historic low of 1.03. All these moves were driven by political uncertainty.

Why did the pound rise? I think the key lies in the recent changes in interest rate policies. Starting in 2023, as the US slowed its rate hikes and the Bank of England maintained a hawkish stance, the pound gradually stabilized. So far, the exchange rate has been fluctuating around 1.26. More importantly, the market now generally expects the US to enter a rate-cutting cycle, while the UK continues to keep interest rates high. This “policy mismatch” directly pushed the pound higher.

I’ve identified three core logics behind the pound’s movements. First, the stability of UK politics directly determines the pound’s direction. Whenever there’s a sense that “Britain can’t get its act together,” the pound tends to fall first. Second, the US rate hike cycle puts pressure on the pound, but now the situation has reversed — the US is cutting rates, while the UK maintains high rates, so capital naturally flows into pound assets. Third, as long as the UK’s economic data remains solid, employment growth is strong, and the central bank stays hawkish, the market will remain bullish on the pound.

On the fundamentals side, although the UK’s economic growth momentum is limited, it’s not out of control. The latest data shows inflation at around 3.2% annually, unemployment stable at 4.1%, and wages growing strongly. The Bank of England has explicitly stated it will keep interest rates high for a long time to combat inflation, which provides strong support for the pound.

From a trading perspective, London time is the most active period for pound trading, especially from the London open to the US market open, when volatility is at its peak. If you want to trade the pound, you must pay close attention to the Bank of England’s decisions and key economic data releases.

In summary, the pound’s rise is mainly due to the declining attractiveness of the dollar, the UK’s interest rate advantage, and relatively stable economic fundamentals. But the pound is a currency that can change game rules at any time due to political factors. If you want to participate in pound trading, you must constantly monitor policy developments in the UK and US, rather than just technical analysis. Only then can you find real opportunities amid the pound’s volatility.