The GBP-USD is the ticker for the pound to dollar exchange rate. GBP/USD belongs to the ‘majors’ group in Forex market, which represent the currency pairs with the highest daily trading volumes, specially among UK traders. Aside from being one of the oldest tradable pairs, the GBPUSD trading is also very liquid and offers UK traders significantly tighter spreads than the minors. The GBPUSD trading currency pair has the pound sterling as the base currency and the US dollar as the quote currency. This means that the price of the GBP-USD at any given time represents the amount of US dollars it would take to exchange for one British pound.
History of GBPUSD Trading
The GBP USD has an interesting history, as it represents currencies that have, at different times in history, been the world’s de facto reserve currency. It is Britain that colonized the United States, and the pound sterling dominated world finance before World War 1 erupted in 1914, with over 60% of global debt held in the currency. The US dollar later caught up with the pound in the 1920s, and by 1944, in tandem with the global implementation of the Bretton Woods monetary system, the British pound became pegged to the US dollar. It was not until the dissolution of the system in 1971 that currencies began floating freely against each other in the markets.
Currently, the US dollar is the currency most held in reserve around the world. The pound comes in third, just behind the euro (EUR). The GBPUSD trading has always been referred to as Cable, referencing the first transatlantic communication cable that connects the UK and US, and which was used to transmit exchange rates between the countries.
GBP/USD Highs and Lows
Since the GBP-USD started trading, it has had major highlights in its history. In 1992, on 16 September, a day referred to as the Black Wednesday, the GBP USD tanked 25% as Britain left the European Exchange Rate Mechanism. A more recent highlight would be the 2016 Brexit vote that ensured Britain’s exit from the European Union. The GBP-USD lost over 10% in one day after headlines came out that the UK had indeed voted to exit the EU. Aside from those highlights, GBP/USD has historically hit all-time highs of 2.466 and all-time lows of 1.05. All these extremes were posted in the 1980s. During the 2007/08 global financial crisis, the pair hit highs of 2.11 and lows of 1.426.
Bodies Influencing the GBP-USD Trading
Monetary policy is a major factor influencing the GBP USD trading as proven by one of the major highlights of the pair. In the UK, the Bank of England releases rates every month. It is vital to point out that the BoE does not follow up with a rate statement when it maintains interest rates, but will do so when it either hikes or cuts the rates. As for the US, the Federal Reserve will release rates eight times a year; and with the US dollar being the world’s largest reserve currency, the eight dates are very important for the forex trading markets.
Employment numbers are also very important for both economies, as they usually guide monetary policy for the Central Banks. Both the US Bureau of Labor Statistics and the UK Office of National Statistics release employment figures monthly. The figures usually spur much volatility on the GBP-USD. Furthermore, the GBP-USD has proven very sensitive to political news, and traders ought to keep track of political events in both the UK and US so as to take advantage of potential triggers to volatility. The GBP USD trading online is also positively correlated with the EUR-USD, but negatively correlated with the USDCHF.
Some Reasons to Trade GBP/USD
There are many reasons that cause traders to choose the GBP/USD as a good way to participate in the global forex market. While not comprehensive, below is a list of some of those reasons:
- Liquid –
There are few pairs that are more liquid than the GBP/USD, which is the third-most traded currency pair and accounts for roughly 14% of all currency trading volume. This makes the GBP/USD very attractive in terms of spreads and lack of slippage.
- Volatility –
The GBP/USD is well known for its volatility, and that makes it very attract to day traders, who can often extract a larger number of pips when trading this pair versus a less volatile pair such as the EUR/USD.
- Available resources –
Trading the GBP/USD is made far easier for the wealth of resources that are easily available. That includes both technical analysis tools and fundamental news and data. Traders can easily pull up any charts they need for technical analysis and make immediate decisions based on the immediacy of news sources and economic data releases.
- Opportunity –
Because of the volatility seen in the GBP/USD it often presents traders with opportunities to jump into a momentum trade. The pair tends to see moves that are sizeable on most sessions, and it is a very good choice for those looking to trade breakout moves.
- Safety –
Even though it is a volatile trading pair, the availability of resources makes it one of the safer trading plays. There are very rarely any true surprises from this pair, but traders can take advantage of the volatility and excellent volumes to potentially profit.
Some Drawbacks and Risks of GBP/USD Trading
As you’ve already learned, there are many reasons traders like the GBP/USD. However, there are also risks to consider from trading this pair:
- Automation –
As a human trader you are sometimes under a disadvantage when trading these days because of the large number of automated trading systems, or robots, that are active in this market. This means you need a good strategy to stay ahead.
- Ambiguity –
While volatility can help generate profits, it also contributes to the ambiguity of this pair, which can often experience false breakouts and false signals. Traders need to keep their wits about them and pay close attention to avoid being tricked by misleading signals.
Fast moving – Some traders love a fast-moving market, and the GBP/USD certainly fits that description. Price can move very rapidly for this pair. That can provide quick profits in some cases, but it can also deliver quick losses in others. This characteristic makes it vitally important for traders to use excellent money management and risk management when trading GBP/USD.
Best Times to Trade GBP/USD
Some traders feel like they need to keep their charts open 24 hours a day when trading the GBP/USD, since the forex markets run 24-hours a day. That’s a misconception that should be done away with. Successful traders know the best time to trade GBP/USD is when there is enough volatility and volume in the markets to allow for the best trading opportunities. During quiet periods in the market spreads widen and price action remains muted. Avoiding those times allows you to concentrate your trades into the optimal periods. The best time for trading GBP/USD is when both UK and US markets are open for trading. This is from 8:00 AM to 10:00 AM GMT and from 12:00 pm TO 15:00 PM GMT. This is when the greatest market moves occur and when spreads are at their lowest.
Because the US dollar and the UK Pound are two of the most traded currencies in the world, the GBP/USD pairing can present traders with excellent opportunities. It is important to remember that you always want an edge when trading in the forex markets. That could come from your strategy or from your timing. In either case trading forex markets is always best when done at the appropriate time of day so you can capitalize on higher volumes and volatility. When you add indicators and signals to identify emerging trends you can often find the best trading opportunities. If you can manage that, while minimizing your risk through the proper use of money management and risk management techniques you’ll be on the path to becoming one of the more successful forex traders.
GBP/USD Trading Main FAQs
- Why is the GBP/USD so popular?
The GBP/USD forex pairing, also called the “cable”, is one of the oldest and most traded currency pairing. The term “cable” refers to the practice of transferring price quotes for the Pound in the 19th century via the undersea cable that crossed the Atlantic. Because the U.K. and the U.S. maintain close ties and large trade agreements there is always a huge need for businesses on both sides of the Atlantic to exchange Pounds for dollars or vice-versa. This liquidity has also made the pair popular with retail traders.
- Why should I trade the GBP/USD?
As one of the most liquid currency pairs traders enjoy tight spreads, great liquidity and fills, and enough volatility to make trading the GBP/USD both interesting and profitable. When it comes to volatility, the pair often trades in a wider range on a daily basis when compared with other pairs. This obviously increases the potential to profit when trading the pair, although it also increases risk. As one of the most traded currency pairs traders will find a wealth of information about the GBP/USD, as well as a number of different ways to trade the pair, ranging from futures to CFDs.
- What is the best strategy for trading the GBP/USD?
There are a number of successful strategies that can be used to trade GBP/USD. Which one is best is going to depend on current market action (trending vs range-bound) as well as the traders own risk appetite and trading psychology. One useful strategy is to trade breakouts in the pair. This strategy works well for GBP/USD because the pair has the tendency to move very strongly following a breakout. Other traders prefer to focus on news reports and trade the volatility that often follows important announcements from the U.S. and U.K.