What Is ‘Cable’?
“Cable” is a slang term for the exchange rate between the U.S. dollar (USD) and the British pound sterling (GBP). The term is used among forex traders. It can also refer to the British pound sterling. The word “cable” refers to the early transatlantic telegraph cables laid between London and New York that were used to communicate currency quotes and other data.
Because the pound and the dollar is one of the most commonly traded currency pairs, this slang term is frequently used.
Key Takeaways
- “Cable” is a slang term for the exchange rate between the U.S. dollar (USD) and the British pound sterling (GBP).
- The exchange rate between the U.S. dollar and the British pound sterling is officially quoted as GBP/USD.
- The term “cable” comes from the telegraph days when the pound and dollar were the most traded currencies.
- As of 2022, the GBP is the fourth largest reserve currency in the world, following the yen, euro, and dollar (which comes in the first place).
- The GBP used to be the primary reserve currency but started to lose ground to the USD following World War I.
Understanding Cable
“Cable” refers only to the British pound with reference to its trading against the dollar, typically quoted as GBP/USD.
Quotes against other currencies such as the euro (EUR) or the Japanese yen (JPY) refer to the pound as sterling (not cable), as in “I need a price in sterling/yen” or, “I think euro/sterling will rebound from its current lows.”
The currency code for the pound is GBP, which stands for Great Britain pound. You may hear someone dealing in the forex market say, “Cable is up today” or, “Cable has been trending lower lately.” The symbol for the British pound is £.
This term cable supposedly derives from the advent of the telegraph in the mid-19th century. The pound was the dominant currency at the time, and transactions between the pound and dollar were executed via transatlantic cable. Forex traders were sometimes referred to as “cable dealers,” although this phrase is no longer commonly used.
Dominant Currency Until the Post-World War II Period
The British pound, or pound sterling, is considered the oldest currency still in use. It was the world’s dominant currency for centuries, and thus it was considered the primary reserve currency in which other nations held their excess cash.
As the British Empire dominated global commerce, the pound dominated international finance. It was legal tender in most colonies, including large portions of Africa and Asia. The Empire began to fade following World War I, as the enormous economic cost of the war took a toll on the economy.
With the British government heavily in debt to the U.S., the dollar began to assume the reserve currency status that the pound previously held. This change was complete by 1949, when the British government was forced to devalue the pound by 30%.
By the early part of the 21st century, the dollar was the world’s leading reserve currency, followed by the euro. According to the International Monetary Fund (IMF), the pound has settled into fourth place, trailing the Japanese yen.
Base Currency
In foreign exchange, the base currency is the one against which another currency is compared. When the pound was the world’s dominant currency, it was also the base currency for trading, so a price quote indicated the amount of currency X that needed to be exchanged for the pound.
The pound is still the base currency in trades against the U.S. dollar, Canadian dollar (CAD), and Japanese yen, among others. Therefore, the pound is typically quoted as GBP/USD, GBP/CAD, and GBP/JPY.
But when the euro (EUR) started trading on Jan. 1, 1999, it took over base currency status for any combination in which it was traded. Therefore, when comparing the euro to the pound, it is typically quoted as EUR/GBP.
To find the reverse rate, i.e., how many GBP it takes to buy one USD (which is USD/GBP), divide one by the GBP/USD rate. For example, if the GBP/USD rate is 1.3050, to get the USD/GBP rate, divide one by 1.3050 for a rate of 0.76628.
Examples of How the Cable Has Historically Moved
When charting the GBP/USD, if the rate is rising it means the GBP is performing better than the USD, or the USD is underperforming the GBP. This is because it is taking more and more USD to buy one GBP.
When the GBP/USD rate is falling, that means it costs less USD to buy one GBP, and therefore the GBP is declining in value relative to the USD.
For an example of this, the following chart shows the GBP/USD rate from mid-1996 to 2022.
In September 2022, the pound declined dramatically against the dollar. The markets reacted negatively to economic plans from the administration of new U.K. Prime Minister Liz Truss, which included broad tax cuts.
While Truss hopes that the tax cuts will increase economic productivity, investors and forex traders were concerned that the move would add to the U.K.’s debt and exacerbate already-high levels of inflation. These uncertainties coincided with strength in the dollar driven by aggressive interest rate hikes by the U.S. Federal Reserve. As a result, the GBP/USD rate tumbled to an all-time low of around 1.03 on Sept. 26, 2022, before posting a slight recovery to roughly 1.06 then.
Why Is the GBP/USD Exchange Rate Called the Cable?
The word “cable” refers to the early underwater telegraph cables that connected London and New York starting in the mid-19th century. In that period, the pound was the dominant currency, and transactions between the pound and dollar were executed via transatlantic cable. The technology for forex trading and the relative global importance of the currencies has shifted, but traders still use the term “cable” to refer specifically to the GBP/USD currency pair.
What Is a Reserve Currency?
Reserve currency refers to money that central banks and other financial institutions around the world hold to use for investments, transactions, and international debt obligations. The British pound was the world’s dominant currency for centuries and remained the primary reserve currency until the period following World War II, when the U.S. dollar replaced the pound as the main currency in which other countries hold their excess cash.
Why Did the Pound Decline Against the Dollar in 2022?
The cable, or GBP/USD rate, sank to an all-time low around 1.03 in late September 2022 after new U.K. Prime Minister Liz Truss announced an economic policy centered on tax cuts. Investors and forex traders appeared to be concerned that the tax cuts would increase the U.K.’s debts and heighten inflation, leading to the pound’s weakness against the dollar.
The Bottom Line
“Cable” refers to the foreign currency exchange rate between the U.S. dollar (USD) and the British pound sterling (GBP). The term derives from the transatlantic cables that were laid between London and New York and were used to communicate currency quotes and other data. Officially quoted as GBP/USD, the cable remains among the most commonly traded currency pairs.
