What it means
Cable is a quoted exchange rate like any other, but the slang signals a specific pair in a specific direction. The pound is the base currency and the dollar is the quote currency, so the number tells you how many dollars one pound buys.
When cable rises the pound is strengthening against the dollar, and when it falls the pound is weakening. Traders care about the pair because it is one of the most heavily traded in the world and tends to move on both British and American news.
Interest rate decisions from the two central banks, inflation data, employment figures and political events all feed into it. That makes cable unusually sensitive to announcements from two separate economies.
For a business, cable matters whenever pounds and dollars both appear in the ledger. A UK exporter invoicing in dollars receives fewer pounds when cable rises, while a UK importer buying in dollars pays fewer pounds when cable rises.
The same movement is good news for one and bad news for the other, which is why the direction of your exposure has to be clear before you hedge anything. Movements are described in pips, meaning the fourth decimal place of the quote.
A move from 1.2500 to 1.2550 is 50 pips, and on a large exposure that small-looking shift can be worth a great deal of money. Finance teams normally convert pip moves into cash at risk before deciding whether to act.
The common nuance is direction confusion. Because most currency pairs are quoted against the dollar as the base, people sometimes invert cable in their heads and read a rise as a weaker pound.
The safe habit is to say the sentence out loud: one pound buys this many dollars. Hedging decisions follow from the size and the certainty of the exposure.
Contracted receipts and payments are usually hedged with forward contracts, while forecast amounts are often only partly covered because the forecast itself may be wrong. Most finance policies therefore set a hedge ratio by time horizon rather than hedging everything.
In practice
Real-world examples.
Example
A British whisky distiller sells $4,000,000 a year into the United States. Cable strengthens from 1.2500 to 1.3000 over a season, cutting sterling receipts from GBP 3,200,000 to GBP 3,076,923, so the finance director starts hedging 70% of expected dollar income with forward contracts.
Example
A UK engineering firm buys $900,000 of American machine parts. Cable moves from 1.2000 to 1.2500 before the invoice is settled, reducing the sterling cost from GBP 750,000 to GBP 720,000 and handing the firm an unbudgeted GBP 30,000 saving.
Example
A London treasury analyst reports that cable fell 120 pips after a weaker-than-expected British inflation release. On the company's $5,000,000 dollar payables, she flags that the move has increased the sterling cost and recommends bringing forward part of the hedge.
Formula
Calculation
Formula: pounds received = dollar amount / cable rate, and dollars received = pound amount x cable rate. Worked example: a UK consultancy expects a customer payment of $650,000 in three months. At a cable rate of 1.2500, that converts to 650,000 / 1.2500 = GBP 520,000. If cable moves to 1.3000 before the payment arrives, the same dollars convert to 650,000 / 1.3000 = GBP 500,000. The stronger pound has cost the consultancy GBP 20,000, which is the exposure a forward contract would have fixed.Case study
Seen in the real world.
This is an illustrative and entirely fictional case. Penrose Instruments, an invented British maker of laboratory equipment, priced all its exports in dollars because American customers preferred it, and left every receipt unhedged.
Across one financial year cable moved from roughly 1.2000 to roughly 1.3000, and the company's $8,000,000 of dollar sales converted to about GBP 6,154,000 instead of the GBP 6,667,000 assumed in the budget. The shortfall of roughly GBP 513,000 wiped out most of the year's profit growth even though sales volumes had risen.
In this fictional example Penrose responded by hedging a rolling 60% of forecast dollar receipts and by adding a currency clause to new contracts. Profit stopped swinging on a rate the company could not influence.
Watch out
Common mistakes.
- Reading cable upside down and assuming a higher number means a weaker pound, when it means one pound buys more dollars.
- Hedging the wrong direction because the business never established whether it is a net receiver or a net payer of dollars.
- Quoting pip movements to management without converting them into cash, which hides how much money is actually at risk.
Questions
People also ask.
Why is it called cable?
Because the London to New York rate was transmitted by transatlantic telegraph cable from the 1860s onwards, and the nickname stuck.
Is cable the same as GBP/USD?
Yes, cable is simply market slang for the GBP/USD currency pair and its quoted rate.
Does a small business need to watch cable?
Only if it buys or sells in dollars while reporting in pounds, in which case even modest moves can change margin noticeably.
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