Currency pair GBP / USD (British Pound to US Dollar) refers to the “majors” – the main and most liquid pairs of the Forex market along with EUR / USD, USD / CHF, AUD / USD, USD / JPY and others. According to some data, it accounts for 12% to 17% of the total trade turnover of the foreign exchange market.
The base currency of the pair is the British Pound (GBP) and the quoted currency is the US Dollar (USD). This means that the upward movement of the pair’s chart will indicate that the pound rate is beginning to strengthen, while the dollar is weakening at this time.
The British pound is considered by many to be one of the most aggressive currencies in the financial market, and it is it that allows the GBP / USD pair to create high volatility. The behavior of the quotes of this pair is often unpredictable and creates many “false” breakouts of support and resistance levels on the charts.
In this article we will tell you a little more about the history of the pair, describe the factors influencing the movement of its price, and also offer a simple strategy for trading.
A Brief History of the Pound and GPB / USD
The full name of the UK currency is Pound sterling… The history of this currency goes back to 775. Due to the development of trade relations between Britain and its colonies, it became necessary to pay for the supplied goods and sea transportation.
One of the versions of the origin of the term “Pound Sterling” is associated with the method of minting coins at that time. For this, silver was used, from 1 pound of which 240 coins were obtained. They began to be called “Sterlings”, hence the term, which has been fixed since 1694, originates.
As for the GBP / USD pair, one of its informal names – “Cable” – is associated with a real cable that is laid along the bottom of the Atlantic Ocean for the uninterrupted exchange of quotes for the pair.
From stories – let’s get down to specifics.
What affects the GBP / USD quotes?
The main driving force behind the behavior of this currency pair in the market is macroeconomic indicators and data from the UK. Also, two other factors have an impact on the exchange rate:
- The general situation in the foreign exchange market.
- Difference between UK and US interest rate levels.
The monetary policy of the Central Bank of England is a fundamental element in the formation of the pound’s quotes in the world foreign exchange market. After Brexit, the Central Bank of England took measures to stabilize and restore the British pound rate in the world market, which are being implemented to this day.
The main lever of influence of the Bank of England on the pound rate is the decision on the interest rate. If the rate rises, then the pound is strengthening. As the rate decreases, the British currency weakens accordingly.
Other economic events in Foggy Albion are also having a strong impact on the GBP / USD price. Among them are:
- GDP data. Published once every 3 months.
- Consumer price index. This parameter demonstrates the level of inflation, which directly affects the decision on the size of the key rate.
- The number of applications for unemployment benefits.
- Business activity indices.
The last two reports provide an overview of the overall health of the UK economy.
For the mass of news from the British Isles, do not forget about the data from the United States, which also affect the price movement of the currency pair. These include the same reports: GDP, interest rate decisions, employment and unemployment figures.
You can keep track of all these events using the economic calendar, for example, on the RoboForex website.
How to trade the GBP / USD currency pair?
To work successfully with this financial instrument, a trader needs to identify and understand all the key features of the GBP / USD currency pair, as well as know in what periods of time it is most active.
The average daily volatility level of the GBP / USD currency pair is in the range of 100 – 140 points. The maximum trading activity for this financial instrument can be noted during the American and European trading sessions.
To trade the GBP / USD pair, you can choose any type of analysis and receive signals – from simple fundamental analysis to signals from technical indicators.
The most passive period for this financial instrument is the Asian session (night time in Europe) – during it the volatility does not exceed 30 points.
Often, the British pound can behave ambiguously or unpredictably: it depreciates when it is expected to rise in price, and vice versa. The price can either immediately react to the release of a certain news, or do it with a delay and gradually.
Let’s consider several ways to trade GBP / USD using different analysis methods.
Trading GBP / USD with Fundamental Analysis
We have discussed the main economic events that affect the quotes of this pair above. A trader only needs to closely follow the calendar and be aware of the dates of upcoming important events in the UK and US economies.
High volatility of the pair can grow even more at the moments of news release – during such periods you need to be very careful and not neglect Stop Loss orders. For trading GBP / USD in conjunction with fundamental analysis, both short-term (intraday) and medium-term strategies are suitable.
Consider the chart of the pair at the time of Brexit’s announcement on June 23, 2016.
The fall in GBP / USD began immediately after the results of the referendum and lasted more than 3 months. The market fell by almost 4,000 points.
Trading GBP / USD with technical analysis
Any method of chart analysis is suitable for trading a pair. You can use the author’s methods (Elliott, Williams, Raschke), or technical analysis figures. The principles of their use do not differ from those for other currency pairs.
Consider the graph of the pair from March 20, 2020. An Inverted Head and Shoulders reversal structure has formed on the chart.
The structure took about 11 months to form. The market grew by almost 2,700 basis points.
Trading GBP / USD using indicators
You can receive signals for GBP / USD using both trend indicators and oscillators. The standard set of indicators in the MetaTrader 4 terminal will be quite enough.
As an example, we can consider using the MACD indicator to receive signals.
Also, the following strategies are great for trading this currency pair:
Trading strategy for GBP / USD during the European session
The European session starts in Frankfurt at 07:00 (GMT). The trader needs to monitor the movement of quotes on both sides of the price at the opening of the session.
The algorithm is as follows:
1. Expect a movement 30-40 points above and below the price at the opening of the session.
2. This move will create a certain range for trading. A market entry is made when the upper or lower border of this range is violated.
It is best if the price moves to the low, then to the high, and then breaks the low. The inverse pattern is also suitable, when the price rises to the maximum, retreats to the minimum and breaks the maximum.
3. The Primary Stop Loss is placed 40 pips from the entry point.
4. Profit is fixed from half of the position volume upon reaching 40 points. For the rest of the position, a Trailing Stop of 20 points is set.
Situations should be avoided when the initial movement in each direction was significantly more than 40 points. High volatility movements create large ranges for potential tracking and position entry, which are not suitable for trading.
Since we expect movement from 30 pips and above and below the opening price, we often have to wait an hour or more for a suitable breakout to trade. Until the breakout has occurred, you should not enter the market.
The UK economy is nominally the 5th largest in the world, and the Pound (GBP) is one of the most popular currencies in the Forex market. For many traders working on Forex, it is the British pound that is their favorite, and often even the only trading asset.
For trading GBP / USD, you can use various tools that will help you in your work, but the main thing is to be able to use them correctly. In addition, it is necessary to remember and adhere to the rules and principles of money and risk management. Also, it will not be superfluous to study the key aspects of the psychology of trading. All this together will help you better understand the specifics of the market.
Do not forget about the increased volatility of the pair – you should start trading GBP / USD with a demo account, and then, with sufficient training time, switch to a real one.
Good luck to everyone and accompanying trends!