GBP/USD is one of the most popular currency pairs to trade in the forex market. Admirals has a comprehensive guide to how to trade GBP/USD successfully.
GBP/USD is the third most popular currency pair to trade in the forex market after EUR/USD and USD/JPY, and it's popular for many reasons. To begin with, the United Kingdom is the fifth largest economy in the world, while the United States is the largest. Aside from that, there is a lot of liquidity and volatility in the pair, making it possible for traders to enter and exit the market rather easily. And lastly, getting information on the two countries is relatively easy compared to other countries like Norway or Brazil.
In the currency market, GBP/USD is often known as "the cable", which is a term derived from the first transatlantic cable that was laid from the US to the UK for communication purposes back in 1858. Currency quotes were some of the types of information transmitted through the system, so since then, the exchange rate between the British pound and the US dollar has been referred to as the cable.
In this article, we will arrange Admirals' guide to GBP/USD trading for beginners.
The History of GBP/USD
The GBP/USD pair has a long and rich history. Trade has been conducted between the two currencies for so long that there's no way to tell any kind of relative value for an original Pound other than to its Dollar exchange rate.
The history of GBP/USD mainly began after the gold standard. The modern GBP/USD exchange rate did not really start until the early 1970s, when both the US and the UK switched to the floating exchange rate. Admiral Markets noted that prior to the 1970s, the forex rate of the British Pound and many other currencies were heavily tied to the value of gold. This was part of the Bretton Woods agreement that took place in 1944.
Jumping forward to 2016 brings us to the Brexit vote. We can see from the historical data that the vote left a huge impact on the value of the British pound. The Brexit vote caused GBP to reach its lowest point in 30 years of forex historical data. In fact, it is the weakest GBP/USD exchange rate since 1985. The main difference is that in the 1980s, it was more about the Dollar's strength, while in 2016, it was all about the Sterling weakness.
Another historical moment called "the Sterling flash crash" happened in late 2016. During this time, the Pound moved 6% lower against the Dollar in just a matter of minutes. While the exact cause is still debatable, such an event was enough to shake the currency market for a while.
The main takeaway from the history of GBP/USD is that there is no way to predict what will happen to this pair. Despite its high liquidity, the market is still full of uncertainty. Thus, every GBP/USD trader needs to be prepared for anything and learn how to properly manage trading risks.
How the GBP/USD Exchange Rate Works
When trading GBP/USD, the pound is the base currency and the dollar is the quote currency. The quotes of this pair basically shows the number of US dollars needed to buy one British pound. So, let's say the price of GBP/USD is 1.2400. If you want to buy GBP/USD, then you need 1.24 USD to buy 1 GBP. But if you want to sell GBP/USD, then you will receive 1.24 USD for every 1 GBP.
A unit of measurement in forex trading is called a pip, whose value is 0.0001 of the quoted price. So, if the price moves from 1.24587 to 1.24597, this means one pip move. Now, the difference between the bid/ask price is called the spread. This is a part of the trading cost, so the wider the spread, the higher the cost.
See also: Lowest Spread Forex Brokers for GBP/USD
Best Time to Trade GBP/USD
When trading GBP/USD, timing is highly important. Many traders believe that the best time to trade GBP/USD is during the major session opening hours, even though you can technically trade GBP/USD 24 hours a day, five days a week. According to Admiral Markets, Here are the prime market sessions to trade GBP/USD:
- London opening hour (07:00 London time): During this time, volumes will start to pick up as market participants digest the events during the late US and Asian market sessions. Thus, you will see the momentum starting to build at this time which also coincides with the European market opening. Major breakouts usually occur during this time.
- New York opening hour (07:00 New York time): The market is most busy during the intersection of the European and American sessions, so it's often seen as the best time to trade liquid pairs like GBP/USD. The crossover is usually associated with the continuation of the moves observed in the European session.
The volatility is usually high during the early session of the European and American sessions because that's when the most economic numbers that might affect the prices are released. Meanwhile, the Asian session is usually associated with low volatility.
Factors Impacting GBP/USD
In order to successfully trade GBP/USD, the most important thing to do is to understand the two economies and the factors that could influence the exchange rates. Without such knowledge, you won't be able to make proper trading decisions. The followings are the key fundamentals and economic indicators to consider:
- The UK and the US economies: International demand for a currency typically moves toward economies that are growing strong. So, when the UK economy is looking strong and the US economy is weakening, this might lead to GBP/USD exchange rate rising and vice versa.
- Bank of England (BoE) policy: Each month, the UK's central bank meets to release the BoE Monetary Policy Summary report which highlights the reasons why the bank decided to either cut, increase, or hold interest rates. More often than not, a currency will fall after an interest rate cut and vice versa.
- Political events: Political events like the Brexit vote or government elections could lead to major movements in a currency. This is why traders need to stay updated with the latest political and economic news of the two countries.
- Economic data: Aside from the factors above, there are also smaller economic data that could influence GBP/USD exchange rate in the short term. This mostly consists of economic announcements like retail sales, inflation, employment numbers, and more.
How to Trade GBP/USD
There are countless approaches that you can use to trade GBP/USD. For instance, many short-term traders like to day trade around high-impact news releases in an attempt to capture the volatility following the announcements. Meanwhile, long-term traders tend to track news announcements that could impact GBP/USD in order to identify potential trends to trade.
Furthermore, GBP/USD is one of the best pairs to trade using technical analysis. This is mainly due to the high correlation between the two currencies. The process involves looking at historical price movements and identifying patterns to determine what might happen in the future. Most technical traders would use technical indicators to help them make informed decisions and spot confirmation signals on the chart.
One of the tools that you can use to trade GBP/USD is Admiral Markets' MetaTrader tools, the Supreme Edition plugin. It can give you quick information on the bullish/bearishness of the currency pair on multiple timeframes and indicators.
Admiral Markets is a forex and CFD brokerage that has been operating since 2001 to provide smart financial answers for traders around the globe. Their main services revolve around 3 key activities: Learning, Trade, and investing. In doing so, they have many registered subsidiaries, including Admiral Markets UK Ltd, Admiral Markets Pty Ltd (Australia), Admiral Markets AS Jordan Ltd, Admiral Markets Cyprus Ltd, Admirals SA (Pty) Ltd (South Africa), and Aglobe Investments Ltd (Seychelles) for the worldwide market.