Pound Sterling against the US dollar (GBP/USD) is the third most traded forex pair in the world and accounts for just under 10% of global foreign exchange turnover. The pair – also referred to as ‘cable’ – enjoys high levels of liquidity and tight bid-offer spreads making it easy and cheap to trade, especially during London and US trading hours. This liquidity means that a range of traders, from individuals through to large corporations, can easily take an outright position, or hedge a US dollar or Sterling obligation, without disrupting the market.
The Importance of Liquidity in Forex Trading
Before 1971, the US dollar, Pound Sterling, and an array of other currencies had their value pegged to gold – Bretton Woods – as the world demanded economic stability to rebuild post-war. This changed on August 15, 1971, when the US dollar, and a range of other gold-pegged currencies, left the Bretton Wood system and became free-floating currencies.
Bank for International Settlements (BIS) – FX Volume/Liquidity
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Since then, these currencies have been quoted against each other with each pair moving on country-specific drivers – including interest rates, growth rates, and inflation - increasing liquidity flows.
The History of Forex
GBP/USD has nearly five decades of history as a free-floating currency pair, and combined with being a quote on two of the world’s top five economies, is regarded as a major currency pair with liquidity provided around the clock. This history and liquidity help provide a vast array of data and prices, making both fundamental and technical analysis clear and easy to use.
Sterling vs. US Dollar (GBPUSD) 1975 – November 2020
Why Trade GBP/USD?
GBP/USD is one of the best currency pairs to trade in the foreign exchange market due to the vast pool of liquidity available, the – normally - stable economic backgrounds of both countries, and the ultra-tight trading quotes available 24/7 across different time zones. This gives traders the ability to deal with a minimum of unexpected political risk when compared to commodity and emerging market currencies, leaving the market price a true reflection of underlying economic conditions without any political premiums built-in. With a trading history of five decades, GBP/USD has a large pool of data, long-term historical trends, and price action that can make technical analysis accurate
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and trading decisions easier. Due to this liquidity, GBP/USD can also be traded in different forms including spot and forward cash prices, options, and CFDs, again adding to the pair’s allure for traders across a range of markets.
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When is the Best Time to Trade GBP/USD?
While GBP/USD is one of the most liquid currency pairs in the market, there are certain times during the day that liquidity is higher than at other times. The UK ‘trading hours’ normally run from 07:00 GMT until around 16:30 GMT as the UK takes over from Asia before handing over to the US later in the day. During these hours there are additional pockets of volatility including but not exclusively, when either the UK or US release important data or changes to monetary policy, when either US or UK central bankers and policy makers speak, and at 16:00 GMT when the daily benchmark foreign exchange rates (FIX) are set.
GBP/USD One Hour Chart with Tick Volume Data via @IG.com
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One of the many attractions of trading GBP/USD is that there are potentially market moving events and releases throughout the day, from both the UK and from the US, with ample liquidity surrounding these events.
GBP/USD Fundamental Analysis – What to Look For
Traders should be aware of the economic and political background in both the US and the UK before trading GBP/USD. This should include levels of interest rates, inflation, and growth rates as well as consumer behaviour and spending patterns, and trade flows in and out of the country. Fundamental analysis should also include other ‘big picture’ analysis including a changing political or trade landscape, for example, Brexit in the UK, a new administration in the White House in the US, and the monthly PMI sentiment release. Fiscal policy is also very important and traders should closely monitor policy papers and speeches made by both governments.
DailyFX Economic Calendar – High Importance UK and US Data Releases (Example)
Forex Fundamental Analysis on DailyFX offers a complete primer on how central banks impact the forex market, and how to use news and key economic events to make trading decisions.
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GBP/USD Technical Analysis – Charts Patterns and
Indicators Technical analysis is the use of past price movements and patterns to help forecast future price movements. GBP/USD is particularly well suited to technical analysis as the pair have a long history and trade on tight bid-offer spreads to allow accurate and reliable price analysis. A wide variety of technical analysis techniques can be applied to the pair and traders need to be comfortable using different techniques and back test them before using them. Some of the most common techniques include Candlesticks, Trendlines, Relative Strength Index and Moving Averages:
Technical Analysis – Tools to Get You Started
GBP/USD Price Chart with Moving Averages and RSI
Chart via @IG.com
Trader Discipline and Psychology
Trader discipline and the understanding of what you are doing and why is a very important element of trading and must rank alongside fundamental and technical analysis as areas that traders need to fully understand. Traders should to know how to use stop losses and leverage correctly and how
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to make sure their risk/return ratios give them the opportunity to make money and curb losses. In addition, being in complete control of your emotions and biases is a must for any trader, especially when markets become more volatile.
Introduction to Trading Psychology and Discipline
How to Trade GBP/USD Summary
• GBP/USD is one of the most consistently liquid and tradeable foreign exchange pairs in the market and should be on every trader’s radar.
• Both central banks are active in keeping the market abreast of economic conditions; fiscal policy is also clearly communicated in a timely fashion.
• Technical analysis is in-depth and widely available, while the pair do not suffer from idiosyncrasies seen in emerging market currencies.
• GBP/USD is particularly well suited to technical analysis as the pair have a long history.
• A comprehensive approach that incorporates both fundamental and technical analysis can help GBP/USD traders develop a robust strategy.
• Developing a comprehensive trading strategy and following sound risk management
techniques are critically important
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• Additional trading resources
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Leveraged trading in foreign currency or off-exchange products on margin carries significant risk and may not be suitable for all investors. We advise you to carefully consider whether trading is appropriate for you based on your personal circumstances. Forex trading involves risk. Losses can exceed deposits. We recommend that you seek independent advice and ensure you fully understand the risks involved before trading.
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Disclaimer
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High Risk Investment
Trading foreign exchange on margin carries a high level of risk, and may not be suitable for all investors. The high degree of leverage can work against you as well as for you. Before deciding to trade foreign exchange you should carefully consider your investment objectives, level of experience, and risk appetite. The possibility exists that you could sustain losses in excess of your
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initial investment. You should be aware of all the risks associated with foreign exchange trading, and seek advice from an independent financial advisor if you have any doubts.
