The fact that one currency is more attractive than another in the foreign exchange market depends on several factors including obviously the trend forecasts but also its own interest rate. It is therefore important to know how the interest rates of the pound sterling and the dollar are set before launching into the GBP/USD trading.
What Is The GBP/USD?
The Forex pair between the pound sterling and the US dollar is called GBP/USD. Practically this pair represents the exchange rate of a pound sterling in dollars. More generally, this pair is called the Cable or the Sterling. The price of the GBP/USD is expressed, as for the other currencies, in pips or, with some brokers, in tenths of pips. Historically it is found that the Cable has evolved from twenty years into a narrow fluctuation channel between 1.40 and 2.10 pips. Its highest result was achieved in 2007 but the pair quickly lost its value due to the current economic crisis which began in 2008. It is therefore in this period and because of the financial crisis that the pair has reached its highest level. low at 1.40 pips. Many traders use Cable to trade on Forex because the indicators that allow it to precede its evolution are very numerous due to the popularity of the US Dollar and the peculiarity of the British Pound.
What Does GBP/USD Depend On?
The GBP/USD exchange rate is influenced by several factors that affect the value of the British pound or US dollar in relation to other currencies. For this reason, for example, the interest rate differences between the Bank of England (BoE) and the Federal Reserve (Fed) influences the value of these currencies when they are related. When the Federal Reserve intervenes on the free market to make the US dollar stronger, for example, the value of the GBP/USD exchange rate tends to fall because the dollar strengthens against the pound.
Which Organizations Sets Rates?
It is generally the central banks of each country that set interest rates for the currencies that concern them. In the specific case of the GBP/USD it is therefore the Federal Reserve or FED that has the task of fixing the rate of the greenback and the Bank of England which manages the interest rates of the pound sterling. Interest rates are regularly revalued by central banks and published in the economic calendar.
Why Do Interest Rates Affect The GBP/USD?
One may ask why the interest rate of a currency makes it more or less interesting for purchase or sale. Just understand that this interest rate is in relation to your earnings or your losses depending on the tendency when you open or close a position. It is therefore more interesting to buy a currency with a low interest rate by selling another with a higher rate. This obviously applies to the GBP/USD.
Some Technical Data
Unlike what beginners think, the GBP/USD pair is one of the most traded currency pairs in the Forex market and alone collects nearly $ 400 billion of trade each year. This volume represents no less than 12% of international trade on the foreign exchange market. However, it is advisable to invest only small or medium numbers on this pair due to an important difference found between the purchase price and the sale price. In the past, Cable has been considered as one of the most volatile pairs, with very significant increases and decreases in just a few hours.
Specificities and Characteristics
It is no coincidence that the currency pair GBP/USD is part of the most popular pairs among traders in the foreign exchange market. In fact, the two economies at stake, the United Kingdom and the United States, are part of the world’s strongest and oldest modern economies. As a result, both the US dollar and the pound sterling are safe currencies due to their size in the international economy. Another interesting feature of the GBP/USD currency pair is the fact that London, is still considered the central square of Forex trading in the world.
In fact, the estimates provide impressive data according to which about 35% of Forex trades are made in London. In fact, this market has the advantage of covering the period preceding the opening of the US market and is therefore one of the most liquid trading periods of the day. The period during which the GBP/USD currency pair can be dealt with is therefore interesting due to such volatility from the often stronger movements given that the major players in London and its periphery enter the market when the UK starts its day of work. It is during what is called the “London session” that these particular features can have an effect on how traders will manage this particular currency.
Trading Strategies for Investing in The GBP/USD
Let’s now turn to the strategic aspect of online investment on the GBP/USD. At first it is necessary to ask yourself when you want to treat this value because, depending on the investment period chosen, the atmosphere and therefore the opportunities and the environment can vary completely.
Depending on the strategy you wish to implement, you will then choose one period or another. It is known in particular that the sessions of Asia, like those of the Sydney and Tokyo markets, are ideal for range strategies with more limited movements on an hourly basis compared to the movements observed during the London or US sessions that offer more activity. The range strategy generally consists of taking buying positions when the cost is low and reaching technical support and then taking a position at the sale when the price is high or reaches technical resistance. This strategy is relatively easy to implement as it does not really require advanced knowledge of the Forex market and technical indicators such as supports and resistances can be viewed live in stock market charts.
You can of course also choose another strategy, particularly breakout strategies, if you wish to invest in the GBP/USD currency pair during periods of high activity, i.e. when the United States and Europe guarantee liquidity. The breakouts consist in following the supports and technical resistances to identify the signals of a trend inversion. These inversions, also called “breakouts”, are in fact more frequent during these periods than during Asian sessions. Let’s take a closer look at this breakout strategy.There are different ways of implementing this type of strategy on the GBP/USD currency pair. We must begin by systematically searching for and analyzing the highest risk / return ratios with, for example, a risk of 20 pips and a target of 100 pips in case of success.
This corresponds in practice to a risk/gain ratio of 1 to 5. In fact, when the risk/return ratio is high and therefore favorable to the trader, two winning positions out of five are enough to generate a profit on this currency pair. Obviously, a good analysis of the currency pair will further increase these statistics with very important gains. To calculate the risk level of a trend and, therefore, of a position taken on the GPB/USD, it is good to identify the previous higher swings with regard to the sales positions and the previous lower swings as regards the positions at purchase. The calculation of the risk/gain ratio can then be used to identify the areas in which to place stop orders within the breakout strategy.
Other technical indicators that can be displayed on the graphs can be used to identify the maximum and minimum breakdowns that could be observed on the historical graphs, i.e. the long-term ones. In summary, as regards the breakout investment strategy, without doubt the most interesting for the GPB/USD, and regardless of the way in which the supports and resistances are identified, you must above all think about implementing this strategy during the periods most active of the day and you have to look for the prices that respect these levels in the calmest periods to get more stable results.
The currency pair GBP/USD still remains a Forex currency pair that cannot be ignored and which obviously also allows other investment strategies. We have presented here only the range and breakout strategies that seem to be the most appropriate for this pair and which prove to be effective depending on the time of day when you take position but nothing prevents you from having your own approach to this value. For example, you can use fundamental analysis to fine-tune your strategy by taking a position in correspondence with important announcements or important events that influence these two currencies and, as we have previously reported, without obviously neglecting the technical aspect with a systematic analysis of the graphs of this currency pair before any stance, if you want to limit the risk of loss to the maximum.
Tips for Trading The GBP/USD
Like all currency pairs, the GBP/USD pair is extremely influenced by the monetary policy of each of the two countries involved, namely Great Britain and the United States. Everyone knows the body that manages this policy in the United States, or the Federal Reserve or FED, while the one that deals with British monetary policy is the Bank of England or BoE. Obviously, the news of the monetary policy of these two countries are not the only element to be taken into consideration to determine the direction that the trend will take. The economic statistics from these two states also have their importance in the Forex. You can then help yourself with the economic calendar to track down the various impacting publications, such as the unemployment rate, GDP or growth figures, and use them.
How to Trade The GBP/USD Pair?
Do you want to invest in the GBP/USD exchange rate or other exchange rates? Online trading platforms such as itbfx.com are the ideal solution to meet your expectations. You can take advantage of numerous decision support tools and practical market analysis tools.