Why is the GBP/USD important to traders?
The British pound to US dollar exchange rate is one of the most liquid currency pairs in the FX market. The narrow bid-ask spreads, volume and volatility all contribute to why the GBP/USD pairing is so popular to trade. It is one of the most cash-rich currency pairs available as well as being the third most traded major currency pair globally.
In this market, the pound sterling is the base currency, and the US dollar is the quote currency. This means the GBP/USD price at any time is the amount of dollars one British pound will buy.
GBP/USD trading hours
Theoretically you can trade forex pairs 24/7, but there are prime times to trade the GBP/USD when the currency pair is more volatile. The GBP/USD is generally busy between 06:00 and 16:00 (GMT).
History of GBP/USD
For most of the 1800s, right up until the start of the First World War, £1 was valued at a small fraction under $5. Exceptionally, during the US civil war, the pound temporarily spiked up in value to $10. The pound sterling was the biggest currency in the world, with over 60% of global debt being held in sterling, pre-WW1. The US dollar caught up in the early 1920s, and by 1944, with the conception of the Bretton-Woods monetary system (an idea that 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 £1:$4.03.
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 decided to drop 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, when adjusted for inflation, you get a slightly different picture. Research conducted by Prof. Elroy Dimson, Prof. Paul Marsh and Dr Mike Staunton of the London Business School suggests that, since World War 2, the pairing has remained effectively level in real terms.
There are two instances, in recent history, where GBP/USD has crashed, meaning the pound has depreciated relative to the dollar, or the dollar has appreciated relative to the pound.
(1) In the aftermath of the global economic recession (The Great Recession), at the start of 2009, the pound hit a 7-year low where £1 was equated to under the $1.40 support ($1.386). Speculation at the time suggested that it was a repercussion of the government’s multi billion-pound lifeline that was extended to support the banking sector.
(2) In 2016, Great Britain held a referendum that decided that the UK would pull out of the European Union by March 2019. On the morning after the result was announced, the pound sterling fell to its lowest level against the US dollar since 1985. Over the duration of that day, the pound dropped by 8%, which was the biggest one-day fall in the pound since the introduction of floating exchange rates following the collapse of the Bretton Woods system in 1971.
Factors influencing the GBP/USD
There is a plethora of factors that will have an effect on the two currencies, in general, and relative to each other over the long term. Changes in: GDP, employment, interest rates, inflation rates, and political shifts within the domestic economy will affect the relevant currency respectively.
Monetary policy is one of the most important factors that influences the GBP/USD. Communications from both central banks can be one of the biggest determinants of the currency pair value. The UK’s Bank of England reviews the interest rate every month, whereas the US Federal Reserve reviews rates eight times a year. A factor specific to the pound sterling at the moment is Brexit. Britain’s relationship with the EU, whatever that may be, will be a huge influencing factor for the foreseeable decade.
How to trade GBP/USD CFDs
GBP/USD is one of the four ‘majors’ in the forex market – the majors represent the currency pairs with the highest daily trading volumes. Plus, of course, it is one of the oldest tradable currency pairs on the market. An individual can trade GBP/USD with either a forex contract or alternatively, they can trade a contract for difference (CFD) on a particular currency pair, and speculate on the price difference.
A CFD is a financial instrument typically between a broker and an investor, 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 investment or trade as CFDs tend to be used within a limited timeframe.
For instance, to trade the GBP/USD currency pair using CFDs, you speculate on the direction of the underlying asset. If you think the pound will appreciate then take a long position by buying the CFDs. If you think the pound will lose value versus the US dollar then you would take a short position by selling CFDs.
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Trading on margin: providing trading on margin (30:1 for major forex pairs), Capital.com gives you access to the GBP/USD pair with the help of CFDs.
Trading the difference: by trading CFDs on GBP/USD, you speculate on the rise or fall of its price. CFDs trading is no different from traditional trading in terms of its associated strategies. A CFD trader can go short or long, set stop and limit losses and apply trading scenarios that align with his or her objectives.
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.
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In 1992, on 16 September, a day coined Black Wednesday, the GBP/USD pairing dived 25%, as Britain dropped out of the European Exchange Rate Mechanism. More recently, in 2016 after the Brexit vote, the GBP/USD lost more than 10% in one day. Since the GBP/USD currency pair was first traded, the all-time high of the pair was 2.455 and an all-time low of 1.05. Both of these extremes were achieved in the 1980s. During the great recession, the pair hit highs of 2.11 and a low 1.426.