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A Guide to GBP/USD Trading

TABLE OF CONTENTS

A Guide to GBP/USD Trading

A Guide to GBP/USD Trading

Vantage Updated Updated Fri, 2024 May 24 01:31

The GBP/USD currency pair, also known as “Cable”, is the third most widely traded currency pair in the world. It is commonly known as a “major” and accounts for about 11% of the total forex market as of 2023 [1]

The term “cable” originated in the mid-19th century when the exchange rate between the GBP and USD was transmitted across the Atlantic via a submarine cable [2].

The pair represents the currencies of two of the largest economies in the world, namely Great Britain and the United States. 

What is GBP/USD Trading? 

Trading the GBP/USD pair involves engaging in the forex market, where traders buy and sell the British pound against the US dollar.

Participants in GBP/USD trading seek to capitalise on movements in the exchange rate, aiming to buy when the pound is undervalued relative to the dollar, and sell when it appreciates.

GBP/USD History

The British Pound (GBP) has been a cornerstone of global finance. Dating back to the Anglo-Saxon era, the pound sterling became the official currency of England in 928 AD [3]. Over time, it evolved into one of the world’s most widely traded and respected currencies, reflecting the economic strength and stability of the United Kingdom.

Paired with the US Dollar (USD), the pound sterling plays a pivotal role in the forex market. The USD, established as the primary reserve currency of the world as a result of the Bretton Woods Agreement in 1944 [4], serves as legal tender in numerous countries beyond US borders, solidifying its status as a global economic powerhouse.

The relationship between the GBP and USD has been influenced by a myriad of historical events. Notably, the USD’s decoupling from the gold standard in 1933 marked a significant shift in global currency dynamics, impacting the GBP/USD exchange rate [5]. Similarly, economic policies implemented by British governments, such as those during the Thatcher era and more recent Brexit negotiations, have had profound effects on the exchange rate [6].

Today, the GBP/USD pair remains one of the most actively traded currency pairs in the forex market, reflecting the ongoing interplay of economic fundamentals, geopolitical events, and market sentiment between the United Kingdom and the United States.

Why Trade GBP/USD Currency Pair?

GBP/USD is popular due to it being one of the most liquid and actively traded pairs in the forex market. This high liquidity appeals to traders as they can trade swiftly and efficiently, with minimal slippage, particularly during regular market conditions. 

Given the dollar’s status as the world’s primary reserve currency, it is subject to diverse influences, such as US economic indicators, Federal Reserve policy decisions, global geopolitical developments, and market sentiment.  

This broad range of factors contributes to the currency’s volatility, providing traders with abundant opportunities to capitalise on market movements and potentially maximise their returns.

Historical Trends of GBP/USD Market [7][8][9][10]

2008

The financial crisis that originated in the United States in 2007 intensified in 2008 with the near collapse of the banking system. This led to widespread market turmoil and a flight to safety, that saw investors seek refuge in the safe haven characteristics of the US dollar. 

A sharp decline in GBP/USD ensued, with cable plunging 29% during the year, from the high in March at 2.0398 to the low in December 2008 at 1.4353. 

2016 

GBP/USD saw a sharp downturn in 2016 with a 22% fall in value in the pound. The high was seen in June at 1.5019 and the low at 1.1649 in early October 2016. 

The Brexit referendum saw the UK vote to leave the European Union. An historic break of a 40-year relationship saw investors desert sterling amid worries about the UK’s relationship with its biggest trading partners.  

The pound suffered its largest ever one-day loss, which ranked with the reaction in 2008 to the collapse of Lehman Brothers and Britain’s exit in 1992 from the European exchange rate mechanism on black Wednesday.  

2022

In 2022, GBP/USD was exceptionally volatile, influenced by ongoing Brexit negotiations, political upheaval and rampant inflation. A recession was also predicted by the Bank of England with household incomes expected to fall sharply and consumption turning negative. 

The combination of runaway inflation and economic contraction, together with political chaos caused sterling to hit multi-decade lows. In one four-month stretch, the UK had four finance ministers, three prime ministers and two monarchs.  

Cable hit a low at 1.0356 USD in September 2022, with the year’s high at 1.3748 in January. That was a fall in value of the pound of 25%.  

GBP/USD Prediction

Chart 1: GBP/USD performance over the past year

According to Trading Economics, GBP/USD is forecast at 1.26 by the end of Q2 2024 and at 1.24 in Q1 2025. ING, an investment bank, expects the major to trade at 1.26 this summer, with a 12-month forecast of 1.25. 

These predictions are based on factors such as economic growth, interest rates, and geopolitical events. However, it’s important to note that currency predictions are inherently uncertain and actual rates may vary. 

What Moves the GBP/USD exchange rate?

1. Interest Rates

Monetary policy decisions by the Bank of England (BoE) and the Federal Reserve (Fed) have a significant impact on GBP/USD. Higher interest rates, and therefore returns, may attract more foreign buyers, which pushes up the value of the currency. 

When the BoE raises interest rates or adopts a hawkish stance in comparison to the Fed, the pound tends to strengthen relative to the dollar. Conversely, when the Fed raises rates or adopts a hawkish stance, the dollar tends to strengthen relative to the pound. 

Stay up to date with the latest market developments by reading our daily market news and analysis

2. Economic Indicators 

Economic data releases such as GDP growth, inflation, employment and wage figures, retail sales, and manufacturing data from both the UK and the US influence GBP/USD. Positive economic data from one country relative to the other can lead to currency appreciation. 

We saw this during the first quarter of 2024 when falling US inflation data stalled and remained relatively elevated, forcing markets to rein in their bets on Fed interest rate cuts.  

3. Political Events

Political developments, including elections, government policies, geopolitical tensions, and trade negotiations, can impact market sentiment and GBP/USD. Uncertainty surrounding political events may lead to increased volatility in the currency pair. 

For example, the tumultuous period in Autumn 2022 when Liz Truss became the shortest-serving prime minister in British history, caused the pound to plunge to levels last seen in 1985.  

4. Market Sentiment

Investor sentiment and risk appetite also play a significant role in driving the GBP/USD exchange rate. During periods of risk aversion, investors may seek safe-haven assets such as the US dollar, leading to appreciation against the pound. Conversely, during risk-on sentiment, the pound may strengthen as investors pursue higher-yielding assets.

An example of this is the GBP/USD exchange rate declining since rising to a five-year high of $1.4245 in May 2021. This was due to sanctions against Russia, which have driven up energy prices, and the effects of quantitative easing during the Covid era [11].

5. Price of Oil

The UK is a net importer of oil, meaning it imports more oil that it exports. When the price of oil rises, it can lead to higher costs for UK businesses and consumers, potentially putting downward pressure on the British economy. This could result in reduced economic growth, lower inflation, and potentially, a weaker pound. 

An example of this is GBP/USD declining from 1.3643 in February 2022. Aside from domestic UK reasons, Russia’s invasion of Ukraine drove up energy prices, while the effects of quantitative easing during the Covid era were still being felt [11]

GBP/USD Correlations

Positive Correlations

EUR/USD 

The correlation between GBP/USD and EUR/USD is generally positive as both the GBP and EUR are from the European region and are subject to similar economic and political events. When EUR rises or falls versus USD, it often pulls the pound along with it.

GBP/SGD 

The GBP/SGD pair has a positive correlation to the GBP/USD pair due to shared influences from the US dollar’s movements against the British pound. If the US economy is strong and the USD appreciates, it will likely appreciate against both the GBP and SGD, causing both GBP/USD and GBP/SGD to move in the same direction

AUD/USD

The Australian Dollar and US Dollar pair also tends to move in the same direction as GBP/USD. This is because both the Australian and British economies are closely tied to commodity prices, and both countries have similar economic structures.

Negative Correlations

USD/JPY

The USD/JPY pair has a negative correlation to the GBP/USD. This is because when the USD strengthens or weakens, it has a direct impact on the value of GBP/USD and an inverse impact on USD/JPY.

USD/CHF

The USD/CHF pair is negatively correlated to the GBP/USD. This is because the Swiss Franc (CHF) is considered a safe haven currency. During periods of economic uncertainty or risk aversion, investors may seek safe-haven assets, leading to a strengthening of the CHF against the USD.

USD/CAD

The USD/CAD also has a negative correlation with GBP/USD. When the USD strengthens, it tends to weaken the Canadian Dollar (CAD), causing USD/CAD to rise.

How to Trade GBP/USD

In this section, we will explore various strategies for trading the GBP/USD currency pair, offering a thorough guide to help you navigate this widely traded forex market.

Trade GBP/USD Using Fundamental Analysis

Fundamental analysis involves evaluating the underlying economic and financial factors that influence the value of an asset, helping traders assess its true worth and make informed investment decisions.

When trading GBP/USD using fundamental analysis, it’s crucial to consider key economic events that can significantly impact the exchange rate. Two examples of such events include:

  • Bank of England Interest Rate Decisions

The Bank of England’s monetary policy decisions, particularly regarding changes in interest rates, can have a substantial impact on GBP/USD. For instance, a decision to raise interest rates may strengthen the pound against the US dollar as it reflects confidence in the UK economy and attracts foreign investment. That said, much will depend on the market’s pricing of future rate expectations in the US and UK.  

In February 2024, the Bank of England kept interest rates at 5.25%. However, the Federal Reserve’s delayed rate cut was weighed on sentiment, causing the GBP/USD to slide [12]

  • US Non-farm Payrolls (NFP) Report

The release of the US Non-farm Payrolls (NFP) report, which provides insights into the employment situation in the United States, can influence market sentiment and the GBP/USD exchange rate. Positive NFP data, indicating robust job growth, may strengthen the US dollar against the pound due to expectations of a stronger US economy and potential future interest rate hikes by the Federal Reserve.

In March 2024, the US economy added 303K jobs, the most in ten months, more than the consensus estimate and compared to a downwardly revised 270K in February [13]. This positive data likely led to a rise in the dollar as it indicated a stronger US economy, causing GBP/USD to drop.

Trade GBP/USD Using Technical Analysis

Technical analysis is a trading method used to evaluate and predict price movements in financial markets by analysing historical price data and trading volumes. It focuses on chart patterns, trends, support and resistance levels, and various technical indicators to identify potential buying or selling opportunities.

The goal of technical analysis is to forecast future price movements based on past market behaviour.

Here are a few types of popular technical analysis tools:

  1. Moving Averages
    Moving averages are used to smooth out price data by creating a constantly updated average price over a specified time period. They can help identify trends and potential trend reversals.
  2. Support and Resistance Levels
    Support levels represent areas where the price tends to find buying interest, preventing it from falling further. Resistance levels, on the other hand, are areas where selling interest tends to emerge, preventing the price from rising further. These levels are identified based on historical price action.
  3. Chart Patterns
    Chart patterns, such as the Evening Star Pattern, Rising Three method, and Three White Soldiers, are formations that appear on price charts and can signal potential trend reversals or continuations.

Technical Analysis Indicators

Technical analysis indicators are mathematical calculations applied to price, volume, or other market data to help traders analyse past price movements, identify trends, and forecast future price directions in financial markets.

  1. Moving Average Convergence Divergence (MACD)
    The MACD is a trend-following momentum indicator that shows the relationship between two moving averages of an asset’s price. It consists of a MACD line (the difference between two exponential moving averages) and a signal line (a moving average of the MACD line).

    When the MACD line crosses above the signal line, it suggests a potential buy signal – bullish crossover. When the MACD line crosses below the signal line, it suggests a potential sell signal – bearish crossover.
  2. Bollinger Bands
    Bollinger Bands consist of a middle band (usually a simple moving average) and two outer bands that are based on the standard deviation of the middle band. They help traders identify overbought or oversold conditions and potential trend reversals.
  3. Fibonacci Retracement
    Fibonacci retracement levels are horizontal lines that indicate potential support and resistance levels based on the Fibonacci sequence.  Traders use these levels to identify areas where the price might reverse direction during a retracement within a larger trend.
  4. Relative Strength Index (RSI)
    The RSI is a momentum oscillator used to measure the speed and change of price movements. It oscillates between 0 and 100 and is used to identify overbought (above 70) or oversold (below 30) conditions in the market. Traders also look for divergences between the RSI and price chart for potential trend reversals.

Risk Management

Effective risk management is important when trading GBP/USD, given its volatility to multiple domestic and external factors. Fluctuations in global economic conditions, geopolitical tensions, and monetary policy decisions in both the UK and the US, can significantly impact the exchange rate.  

Traders must implement robust risk management strategies to mitigate potential risks and safeguard their capital.

This includes setting stop-loss orders, using appropriate position sizing, and diversification with other currency pairs or financial products.

GBP/USD Trading Strategies

When analysing GBP/USD, traders can utilise various forex strategies tailored to capitalise on its liquidity and sensitivity to global events. From trend-following to range-bound tactics, these strategies need to accommodate the pair’s unique characteristics.  

Traders can combine fundamental analysis with technical tools like chart patterns and sentiment analysis to develop effective trading strategies and capitalise on market opportunities.

What it means to short GBP/USD

When you are short selling the GBP/USD, you are essentially placing a bet that the value of the British Pound (GBP) will decrease in comparison to the US Dollar (USD). This process involves opening a short position, which means you sell the GBP and buy the USD.

If the GBP decreases in value against the USD (which would be reflected in a drop in the price quote), you stand to make a profit.

Learn more about shorting forex pairs in our article here.

What it means to long GBP/USD

To go long, you open a long position, which involves buying the GBP and selling the USD. If the GBP increases in value against the USD (resulting in a rise in the price quote), you will make a profit. The position is closed by selling the GBP at the new, higher price.

Day Trading

Day trading is where individuals buy and sell securities within the same trading day. The primary goal of day trading is to profit from short-term price movements. 
 
Day traders typically use a combination of strategies and analysis, which involves capitalising on short-term trends and reversals. Unlike long-term investors, day traders may be less concerned with the fundamental value of the securities and more focused on capturing immediate gains from market fluctuations. 

Position Trading

Position trading is a strategy where a trading position is held for a longer period (generally weeks or months) to achieve profit. A trader normally has longer-term bias and holds the position for a prolonged period, irrespective of short-term volatility. 

Swing Trading

Swing trading is a style of trading that attempts to capture short- to medium-term gains over a period of a few days to several weeks. Swing traders primarily use technical analysis to look for trading opportunities. 

Swing traders may utilise fundamental analysis in addition to analysing price trends and patterns. This type of trading generally involves holding a position either long or short for more than one trading session, but usually no longer than several weeks or a couple of months. 

Sentiment Trading

Sentiment trading or sentiment analysis is a method that some traders use to try to gain an advantage about what to buy or sell, by reading the signals about how other investors are feeling (investor psychology) about a particular market or stock. 

By understanding the overall sentiment of the market, traders can better anticipate price movements, identify potential trading opportunities, and manage risk more effectively.

News Trading

News trading is the act of making a trade based on news events. This can be anything from economic data releases to political news. The key with news trading is identifying which news events will likely trigger price action which traders can predict and then making trades accordingly. 

Best Time to Trade GBP/USD [14]

The forex market is open continuously, operating 24 hours a day, 5 days a week, spanning multiple time zones such as London and Tokyo. This global accessibility ensures that traders worldwide can engage in trading activities at any time.

For the GBP/USD currency pair, the most dynamic trading periods occur during overlapping sessions when both the London and New York markets overlap.

  1. London and New York Overlap
    The most active trading hours for GBP/USD are during the overlap of London and New York trading sessions. This is when the market offers higher liquidity, resulting in tighter spreads and increased trading opportunities.

    Overlap hours: Between 1:00 PM and 5:00 PM EST
  2. London Trading Session
    The London trading session is another active period for GBP/USD, as the British Pound is one of the major currencies traded during this session.

    London trading session hours: 8:00 AM to 4:00 PM GMT
    During summer months: 7:00 AM to 3:00 PM GMT
  3. New York Trading Session
    The New York trading session is also a good time to trade GBP/USD, as the US Dollar is one of the major currencies traded during this session.

    New York trading session hours: 1:00 PM to 10:00 PM GMT

Final Thoughts

In conclusion, trading GBP/USD offers diverse opportunities for traders, given its liquidity and responsiveness to economic data, geopolitical events, and central bank policies. Whether employing fundamental analysis to assess economic indicators and central bank decisions or utilising technical analysis tools like moving averages and Fibonacci retracements to identify price trends and support levels, traders have a wide array of approaches at their disposal.

Trading GBP/USD Currency Pair with Tight Spreads at Vantage

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FAQs for GBP/USD Trading

What is the Spread on GBP/USD at Vantage?

At Vantage, the spread on AUD/USD is competitively low. Traders can enjoy spreads starting from under 1 pip during high-liquidity periods. For RAW accounts, spreads start at 0.0 pip, and for Standard accounts, they start at 1.0 pip.

Find out more about our different types of accounts.

What are the risks of trading GBP/USD?

Trading GBP/USD carries risks due to its volatility, driven by economic data, geopolitical events, and market sentiment. Economic indicators and geopolitical factors affecting the UK and US economies can influence the exchange rate, exposing traders to potential losses. 

Leverage amplifies both profits and losses, while liquidity risk during low trading volume can impact trade execution. Effective risk management, including setting stop-loss orders and managing leverage, is crucial for mitigating these risks.

Is GBP/USD a Good Pair to Trade?

Due to its high liquidity and volatility, the USD/CAD can be a good pair to trade. It often reacts swiftly to economic data and central bank policies, offering numerous trading opportunities.

Why Pound is Stronger than Dollar

Economic performance plays a significant role, as a robust UK economy, marked by strong GDP growth and favourable employment figures, can boost investor confidence and drive demand for the pound. Higher interest rates in the UK relative to the US can also attract foreign investment seeking higher yields, contributing to the pound’s strength against the dollar.

References

  1. “GBP/USD (British Pound/U.S. Dollar): Definition and Calculation – Investopedia” https://www.investopedia.com/terms/forex/g/gbp-usd-british-pound-us-dollar-currency-pair.asp Accessed 24 April 2024 
  2. “Why is the GBP/USD Currency Pair Known as Trading the Cable? – Investopedia” https://www.investopedia.com/ask/answers/09/trading-the-cable.asp Accessed 24 April 2024 
  3. “A short history of the British pound – World Economic Forum” https://www.weforum.org/agenda/2016/06/a-short-history-of-the-british-pound/ Accessed 24 April 2024 
  4. “How the U.S. Dollar Became the World’s Reserve Currency – Investopedia” https://www.investopedia.com/articles/forex-currencies/092316/how-us-dollar-became-worlds-reserve-currency.asp Accessed 24 April 2024 
  5. “FDR takes United States off gold standard – History” https://www.history.com/this-day-in-history/fdr-takes-united-states-off-gold-standard Accessed 24 April 2024 
  6. “The 200 Year Pound to Dollar Exchange Rate History – From $5 in 1800s to Today’s $1.29 – ExchangeRates.org.uk” https://www.exchangerates.org.uk/articles/1325/the-200-year-pound-to-dollar-exchange-rate-history-from-5-in-1800s-to-todays.html Accessed 24 April 2024 
  7. “Pound Dollar Exchange Rate (GBP USD) – Historical Chart – Macrotrends” https://www.macrotrends.net/2549/pound-dollar-exchange-rate-historical-chart Accessed 24 April 2024 
  8. “GBPUSD: 2023 Overview & 2024 Outlook – Centralfx” https://centralfx.co.uk/gbpusd-2023-overview-2024-outlook/#:~:text=The%20damage%20was%20largely%20caused%20by%20market%20expectations,October%20following%20a%20sustained%20period%20of%20downward%20pressure. Accessed 24 April 2024 
  9. “GBPUSD British Pound US Dollar – Trading Economics” https://tradingeconomics.com/gbpusd:cur Accessed 24 April 2024 
  10. “GBP/USD Forecasts Next 6-12 Months: Top FX Institutional Analysis And Pound-Dollar Predictions – ExchangeRate.org.uk” https://www.exchangerates.org.uk/news/32777/2021-04-29-gbp-usd-pound-to-dollar-exchange-rate-forecasts-next-6-12-months.html Accessed 24 April 2024 
  11. “Performance of British Pound Sterling (GBP) against the US Dollar (USD) in 2022 – GlobalData” https://www.globaldata.com/data-insights/macroeconomic/performance-of-british-pound-sterling-gbp-against-the-us-dollar-usd-in-/ Accessed 25 April 2024 
  12. “Monetary Policy Report – February 2024 – Bank of England” https://www.bankofengland.co.uk/monetary-policy-report/2024/february-2024 Accessed 25 April 2024 
  13. “United States Non Farm Payrolls – Trading Economics” https://tradingeconomics.com/united-states/non-farm-payrolls Accessed 25 April 2024 
  14. “WHEN ARE LONDON AND NEW YORK FOREX OVERLAP? – Forex Academy” https://www.forex.academy/when-are-london-and-new-york-forex-overlap/ Accessed 6 June 2024 
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