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GBP/USD trading explained: How to trade GBP/USD

Learn more about GBP/USD trading – from how the market works and what drives the prices, to different types of instruments and trading strategies. Read on to find out how to trade GBP/USD on Capital.com.
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GBP/USD trading is buying and selling the British pound sterling (GBP) against the US dollar (USD) to speculate on the fluctuations in the foreign exchange (forex) rate.

What is GBP/USD trading?

Are you looking for a GBP/USD trading meaning? When trading the British pound sterling (GBP) against the US dollar (USD), the quote of the currency pair shows the number of US dollars needed to buy one British pound. 

Understanding the GBP/USD pair

What is GBP/USD? The British pound/US dollar exchange rate is one of the most liquid currency pairs in the forex (FX) market. The narrow bid-ask spreads, volume and volatility all contribute to why trading GBP/USD is popular. 

The US is the world’s largest economy and the UK is the fifth largest, making the GBP/USD rate one of the ways to trade on international economic activity. It is one of the most cash-rich currency pairs, as well as being the third most traded major pair globally.

GBP/USD is one of the four ‘majors’ in the forex market, which represent the currency pairs with the highest daily trading volumes. Plus, it is one of the oldest tradable currency pairs on the FX market. 

The GBP/USD pair is often referred to as “Cable”, because information on trading the pound and dollar between London and New York was historically transmitted via telegram cables. Although trading is now done electronically, the term remains popular among FX traders.

In the GBP/USD market, the pound sterling is the base currency, and the US dollar is the quote currency. This means the GBP vs USD rate at any time is the amount of dollars one British pound will buy. The British pound is generally stronger than the US dollar, although it has steadily weakened in value. If the GBP/USD rate is 1.20, for example, it takes $1.20 to buy £1.

Past Performance is not a reliable indicator of future results.

How does GBP/USD trading work?

Forex brokers quote two prices for exchange rates such as GBP/USD: the bid price and the ask price. The bid price refers to how much you receive for selling the pair and the ask price refers to how much you need to pay to buy the pair. 

The difference between the bid and the ask is the spread. The quote is measured in units, or pips. One pip is equal to 0.0001 of the quoted price spread. If the bid price is 1.21246 and the ask price is 1.21255, the spread is 0.00009, which would be 0.9 pips. It is important to take this into account when trading because the spread would have to move by at least 0.9 pips for you to break even on the trade.

History of the GBP/USD exchange rate

For most of the 1800s, right up until the start of the First World War (WW1), £1 was valued at a small fraction under $5. Yet, during the US civil war, the pound temporarily spiked up in value to $10. 

Pre WW1, pound sterling was the biggest currency in the world, with over 60% of global debt being held in sterling. The US dollar caught up in the early 1920s, and by 1944, with the conception of the Bretton-Woods monetary system, whereby the dollar would be fixed to the price of gold and become the unofficial reserve of the world, the pound to dollar exchange rate was pegged at $4.03 to £1.

In 1971, the pound became a free-floating currency as the Bretton-Woods system slowly collapsed. At the same time, the US dollar became free floating, and the US dropped the gold standard.

As a general rule of thumb, since the pound was allowed to free-float against the dollar, the nominal value of the pound depreciated over time, leading people to believe that the pound was slowly weakening.

However, adjusted for inflation, the picture is slightly different. Research conducted by Prof. Elroy Dimson, Prof. Paul Marsh and Dr Mike Staunton of the London Business School suggested that, since World War 2, the pairing has remained effectively level in real terms.

In 1972, the pound reached a high of 2.65, before falling to a low of 1.05 during the following decade. More recently, the pound has declined from 2.08 in October 2007 to the 1.20 level in 2022. 

Economic uncertainties surrounding the coronavirus pandemic, combined with the loss of the European market following Brexit, have weakened prospects for the British economy, while geopolitical tensions and rising interest rates have lifted the value of the dollar.

There are two instances in recent history where the pound to USD rate has crashed, meaning the pound has depreciated relative to the dollar, or the dollar has appreciated relative to the pound.

In the aftermath of the global economic recession at the start of 2009, the pound hit a seven-year low where £1 was equated to under the $1.40 support ($1.386). Speculation at the time suggested that it was a result of the government’s multi-billion-pound lifeline that was extended to support the banking sector.

In 2016, Great Britain held a referendum that decided that the UK would pull out of the European Union by March 2019. In the morning after the result was announced, the pound fell to its lowest level against the US dollar since 1985. 

Over the duration of that day, the pound dropped by 8% – the biggest one-day fall in the currency since the introduction of floating exchange rates following the collapse of the Bretton Woods system in 1971.

GBP/USD historical price chart

What moves the GBP/USD pair?

As the US and UK are major players in international trade and both hold global financial centres in London and New York, there are several factors that can affect the value of the dollar against the pound, including economic indicators and sentiment drivers.

GBP/USD price drivers

Federal Reserve

The policies of the US central bank, the Federal Reserve (Fed), on inflation and interest rates have a strong influence on the value of the US dollar. High inflation erodes the value of currency, while higher interest rates make a currency more attractive for overseas investors.

Bank of England

In the same way that the Fed affects the value of the dollar, the UK’s central bank, the Bank of England (BoE), influences the value of the British pound. Decisions made by the Bank of England’s monetary policy committee (MPC) can move the price of the GBP/USD pair. The BoE and the Fed review rates eight times a year.

Inflation

Inflation numbers are an important indicator of the Fed’s and BoE’s policies on interest rates. Central banks typically raise interest rates to slow their economies and combat high inflation rates. Conversely low inflation is likely to prompt them to cut interest rates.

Employment data

Statistics on employment in the US and the UK are important indicators as to the health of their respective economies, which has an influence on government and central bank policy on economic stimulus.

Geopolitical events

The US dollar is the global reserve currency. It’s seen as a safe haven during times of economic and political uncertainty. For that reason, geopolitical events, such as the Russian invasion of Ukraine, drive investors to sell other currencies and buy the US dollar. 

The UK’s decision to leave the European Union has been the most important geopolitical event in recent years to influence the value of the British pound, as it created uncertainty and expectations that UK trade would be affected.

Retail sales

Consumer data releases such as retail sales are also an important indicator of economic health that can affect sentiment on the pound and the dollar.

Industrial production

Manufacturing activity is another important measure of whether an economy is growing or shrinking, which in turn affects the attractiveness of its currency.

How to trade GBP/USD

Are you interested in how to trade the GBP/USD pair? You can speculate on the exchange rate in a few different ways: on a spot rate via a forex platform, or using a broker trading contracts for difference (CFDs). Let’s look at how to trade GBP/USD using these instruments.  

Spot trading

The spot price in FX trading refers to the current exchange rate for a currency pair. Spot FX contracts are traded on over-the-counter (OTC) contracts between banks and other financial institutions. 

Individual investors can trade on forex platforms that give retail traders access to the secondary OTC market. Traders can buy and sell the currency pair at the spot market price to try to make a profit.

CFD trading 

CFDs allow traders to take a long or short position on the GBP/USD exchange rate without owning the underlying asset. For example, if you expect the value of the pound to fall against the US dollar, you can go short GBP/USD. 

CFD contracts have no expiry. You can use margin to open a leveraged position with a smaller initial investment. Remember that leverage magnifies both profits and losses. 

What is a GBP/USD trading strategy?

It is important to use fundamental and technical analysis when trading GBP/USD to help you decide when you enter and exit trades. There are several different strategies for GBP/USD trading you can use depending on your experience, risk tolerance and preferred approach to trading. 

Day trading strategy

If traders expect short-term exchange rate volatility, they can use a day trade to open and close a position on the GBP/USD pair on the same day. 

Traders use technical analysis tools as well as fundamentals to identify potential opportunities to enter and exit a trade. Day traders avoid overnight financing charges and exposure to changes in fundamentals that could affect the value of the pair.

News trading strategy

A news trading strategy aims to speculate on the volatility that news announcements can create. Day traders can look to news events to help decide when to buy and sell. Long-term traders also follow news events to identify trends that can influence the value of the GBP/USD pair.

Price action trading strategy

Price action strategies focus on tracking an asset’s historical price movement to identify patterns that could indicate where it might trade in the future. 

Studying price action is a popular GBP/USD trading strategy, as the market is open 24 hours, five days a week, is highly liquid with low spreads and uses leverage. This allows traders to respond to price volatility quickly by entering and exiting trades within seconds while keeping their trading fees low. Note that high volatility also means higher risk of loss.

Breakout trading strategy

Breakout trading in forex focuses on open trades when a market is breaking out of a price trend. This strategy may be appropriate to trading the GBP/USD pair as it tends to make strong moves when it breaks out. Remember to always conduct your own due diligence before trading. And never trade money you cannot afford to lose.

How to trade GBP/USD CFDs

A CFD is a financial instrument typically between a broker and a trader, where one party agrees to pay the other the difference in the value of a security, between the start and end of the trade. 

You can either hold a long position, speculating that the price will go up, or a short position, speculating that the price will fall. This is considered a short-term trading as CFDs tend to be used within a limited time frame due to overnight fees.

For instance, to trade GBP/USD using CFDs, you speculate on the direction of the underlying currency pair, without owning the underlying asset. If you think the pound will appreciate, you could take a long position by buying CFDs. If you think the pound will lose value versus the US dollar, you could take a short position by selling CFDs. 

Are you looking into how to trade GBP/USD CFDs? Sign up for an account with a CFD provider like Capital.com. You can trade forex along with stocks and commodities in a single trading account.

Follow these steps to get started:

1. Create and login to your trading account

2. Choose which currency pair you want to trade

3. Use your preferred trading strategy to identify potential buy and sell opportunities

4. Open your first trade and consider using risk management tools such as a stop loss or a guaranteed stop loss to manage risk

5. Monitor your trade using technical indicators and fundamental analysis based on your strategy

6. Close your position when your trading strategy indicates

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Past Performance is not a reliable indicator of future results.

Trading strategies for GBP/USD CFDs

There are several different strategies you can use for trading CFDs in forex markets such as the GBP/USD pair. These include:

Carry trade

In forex markets, the carry trade refers to selling a currency from a country with low interest rates and using the money to buy a currency in a country with high interest rates, to speculate on the difference in yield.

Fundamental analysis

Traders can decide when to buy and sell the GBP/USD pair based on the market fundamentals such as economic data announcements in the US and the UK such as gross domestic product (GDP) growth.

Chart monitoring

Short-term traders can monitor the GBP/USD price charts in a price action trading strategy to identify potential opportunities to enter and exit positions.

Sentiment analysis

Traders often decide to buy and sell currencies based on positive or negative sentiment in the markets. Periods of volatility and uncertainty can drive sentiment on safe haven assets like the US dollar, in turn affecting the GBP/USD exchange rate.

Trading strategies for GBP/USD CFDs

Pros and cons of trading GBP/USD CFDs

There are several advantages to using CFDs to trade the GBP/USD pair rather than other instruments.

Leverage. You can trade CFDs on margin, borrowing from the broker to increase the size of your position relative to your initial capital investment. Leveraged trading can multiply the size of your profits but also increases the risk and the size of your losses. It is important to do your own research and understand how leverage works before you start trading.

Capital.com offers 3.3333% margin for GBP/USD CFDs trading, which amounts to 30:1 leverage. This means, with $33.3333 initial deposit you would be able to open a position worth $1000 as every dollar would represent just 3.33% of the total trade.

GBP/USD CFDs trading example

Hedging. Hedging involves opening a position on an asset to offset any potential loss in their other portfolio holdings. Traders can take positions in markets that are negatively correlated to hedge against falling prices. For example, the USD/JPY to GBP/USD correlation is negative, enabling traders to hedge one pair against the other.

Why trade GBP/USD with Capital.com

Advanced AI technology at its core: A personalised news feed provides users with unique content depending on their preferences. The neural network analyses in-app behaviour and suggests videos and articles that fit your trading behaviour. This will help you to refine your approach when you trade GBP/USD CFDs.

Trading on margin: Thanks to margin trading, Capital.com provides you with the opportunity to trade GBP/USD CFDs and other top-traded forex pairs, even with a limited amount of funds in your account. Keep in mind that CFDs are leveraged products, which means both profits and losses can be magnified. 

Trading the difference: Trading CFDs on GBP/USD, you speculate on the rise or fall of its price. A CFD trader can go short or long, set stop losses, or guaranteed stop losses, and limit losses and apply trading scenarios that align with their objectives. CFD trading is similar to traditional trading in terms of its associated strategies. However, CFD trading is usually short-term in nature, due to overnight charges. Plus, there are extra risks associated with leverage as it can magnify both profits and losses.

All-round trading analysis: The browser-based platform allows traders to shape their own market analysis and forecasts with sleek technical indicators. For instance, a trader could choose to have GBP/USD analysis and forecasts as a big part of their feed. Capital.com provides live market updates and various chart formats, available on desktop, iOS, and Android.

Sign up at Capital.com and use our web platform or download the investment app to trade CFDs on the go. It will take you just three minutes to open an account and view the world’s most traded markets.

GBP/USD trading hours

The GBP/USD market open time is 24 hours a day, five days a week, with the market closing at 22:00 on Fridays. There is no best time to trade GBP/USD. It depends on your risk tolerance and trading strategy. The currency pair might experience higher volumes and volatility typically around major market announcements. The GBP/USD market is generally busy between 06:00 and 16:00 GMT.

At Capital.com, GBP/USD CFDs are available for trading on weekdays:

  • Mon - Wed: 00:00 - 20:58; 21:05 - 00:00
    Thu: 00:00 - 20:58

You can always check the trading hours for this forex pair on its market page at our website or on the platform.

FAQ

What is the best time to trade GBP/USD?

There is no best time to trade GBP/USD. It is possible to trade the currency pair 24/7, and you can choose suitable hours depending on your trading strategy and risk tolerance. Typically, the GBP/USD experience higher volumes when major news events and economic data drive fluctuations in the price, creating opportunities to speculate on the pair.

How to trade GBP/USD?

You can trade the GBP/USD currency pair using a forex trading platform, spread betting provider or contracts for difference (CFD) broker.

Is GBP/USD a good pair?

Whether GBP/USD is a good currency pair for you to trade will depend on your trading approach, experience and risk tolerance. You should do your own research to understand how forex trading works before you get started. And never invest money that you cannot afford to lose.

What time is GBP/USD most volatile?

The GBP/USD market is typically the most volatile between 06:00 and 16:00 GMT.

Is GBP stronger than USD?

The British pound has historically been a stronger currency than the US dollar. It takes more than one US dollar to buy one pound sterling. However, past performance is not a reliable indicator of future results.


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