Shorting the Pound: How to Short Pound Sterling (2024)

Shorting the pound, or British pound sterling (GBP), is a trading strategy that may lead to profits if the price of the British pound falls. Read on to learn how to short the pound, the risks and rewards of doing so, what causes the pound sterling to decline, and the history of large declines in the GBP.

Currencies are traded relative to other currencies. Shorting the GBP against the US dollar (USD) means that the trader expects the pound to fall in value relative to the value of the USD. A person may short (or buy) the pound because of economic differentials — for example, differing expectations of the financial health of countries — or based on technical trading strategies.

Short selling a currency pair​, such as GBP/USD (or sometimes known as “Cable”), means that pounds have been sold and US dollars have been bought. Both these transactions occur when a trader decides to short sell using derivative products such as spread bets or CFDs. When the trade is closed, the difference in the exchange rate between the two transactions determines the profit.

The pound can be shorted against a single currency, such as the USD, euro (EUR), or any other currency. It can also be shorted against a basket of currencies, known as a forex index. Traders can sell short the GBP Index​ to make a general bet that GBP will decline overall against a number of currencies and not just one.

Our GBP Index is an average of how GBP is moving against the EUR, USD, Chinese yuan (CNH), Swiss franc (CHF), Norwegian krone (NOK), Canadian dollar (CAD), Japanese yen (JPY), and Swedish krona (SEK).

Here are the steps for short selling the GBP index. Traders of our platform can use the same process for other GBP-related products.

We offer multiple ways to short the pound through derivative trading. As mentioned, this can be done directly by selling the GBP against another currency, or by selling our proprietary GBP Index. Spread betting is a tax-free way* (in the UK) to go long or short on currencies and is a bet on which way the currency will move. Contracts for difference (CFDs) work in the same way but come with additional costs. Discover the key differences between spread betting and CFD trading​.

Let’s assume that a trader believes that GBP/USD will fall from the current bid price of 1.41483. In this case, the trader is about to place a spread bet to short sell GBP/USD for £1 per pip (a pip being the smallest move a currency pair can make), so for every pip that GBP/USD declines, their profit or loss will increase by £1.

A country’s currency is affected by a number of economic indicators​, such as interest rate differentials, economic news, the demand and supply of the currency, and future expectations of the country and currency.

Interest rates play a key role. All else being equal, the currencies of stable countries with higher interest rates tend to rise against the currencies of stable countries with lower interest rates. This is because higher interest rates create demand for that currency because people and businesses will buy the currency and invest it in that country to receive the higher interest. Individuals can do this by simply buying a higher-interest rate currency relative to a lower-interest rate currency. This is referred to as a carry trade​.

Economic news tells traders how the UK is performing. Traders then compare this information to the rest of the world and decide which currencies look more promising going forward.

Supply and demand are largely driven by the above factors. How a country is performing economically and its interest rate expectations may determine whether more people want to buy the currency (demand) or sell it (supply).

Future expectations also play a large role. Currencies aren’t only affected by what is happening right now, but what could happen in the future. Brexit, for example, created a large unknown. Traders sold GBP because they assumed others would as well in light of ongoing uncertainty. However, as it fell further, more traders predicted that brighter days and higher prices would come, so they started buying, pushing the pound up based on future expectations.

Lowering interest rates while other countries are not doing the same, or poor economic data (relative to expectations), are examples of catalysts that could cause the pound to decline.

In the early 1990s, Britain was forced to leave the European Exchange Rate Mechanism (ERM), a day now known as Black Wednesday. George Soros began shorting the pound ahead of this event, expecting that the UK would not be able to maintain its currency with the strict trading bands required by the ERM.

In essence, Soros believed that the pound was artificially propped up by UK Treasury buying and that eventually it would break lower because the Treasury couldn’t keep buying forever. On September 16, 1992, Britain left the ERM, the Treasury stopped holding up the currency, and GBP fell through the floor.

From September 10 to the December low in 1992, GBP fell more than 25%. George Soros allegedly profited by more than $1bn on the GBP short trade.

During times of panic and unrest, money tends to flow into the USD for its stability and into safe haven currencies like the JPY and CHF. Learn more about the world’s strongest currencies​.

The financial crisis of 2008 was no exception, as GBP/USD sold off aggressively, declining about 35% from its 2008 high to its 2009 low. As the financial crisis ended, GBP/USD gained back some of the losses, rallying around 25% off the 2009 lows over the next eight months.

On October 7, 2016, GBP fell more than 6% in a matter of minutes against the USD, and to varying degrees against other currencies. It then recovered most of the loss just as quickly. The total drop, from high to low on that day, was around 974 pips (this may vary slightly by broker).

GBP/USD had already been under strong selling pressure heading into the collapse. The drop ended up being the low point before a more than year-long rally higher.

This is referred to as a flash crash. Such sharp moves are rare in major global currencies​.

Shorting the pound could be used as a currency hedge​ against long positions in correlated currencies​.

For example, if GBP/USD is positively correlated to the AUD/USD and NZD/USD and you are long on one or both of these pairs, you could sell the GBP/USD to act as a hedge. If your long positions start to drop, then the short GBP/USD position will help offset the losses.

The EUR and CHF tend to be correlated with the GBP. Therefore, if you are long these currencies, you could consider selling the GBP Index or a GBP currency pair.

Correlations are based on past price history, and don’t necessarily indicate future correlation. Therefore, using the pound as a hedge may not always work out as planned.

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