The forex market is the world’s largest financial market, where corporates, speculators, and investors participate in cross-border forex trading. When compared to other financial markets, forex markets are different because they operate through an electronic network of corporations, individuals and banks, trading on a specific currency pair. Volatility, liquidity, competitive rates, leverage, a wide range of currency pairs, and accessibility make the forex market popular among experienced and beginner forex traders. Over the years, countless hedge fund managers have been successful in this industry. For instance, in 1992, George Soros generated roughly £1 billion, which means investors can generate income by trading forex pairs.
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A History of the British Pound and the United States Dollar
The British pound is older than the USD. It has been in the foreign exchange markets since its introduction more than 1,200 years ago. On the other hand, the USD has been the United States’ standard monetary measure for over 200 years.
“The USD is the world’s most traded currency and primary reserve currency”, says the Balance.
The GBP/ USD currency pairing, which has an incredible historical exchange rate, represents a pairing that has been one of the best reserve currencies worldwide for many years. Britain colonised the US, which made the pound dominate the financial market before World War 1 in 1914. However, the USD gained on the pound in the 1920s, and following the implementation of the Bretton Woods monetary system, it surpassed it by 1944. The termination of this system in 1971 made the two currencies freely float against one another in the financial market.
Trading the GBP/USD Currency Pair
The British pound vs. the United States dollar currency pair represents foreign exchange rates between the British Pound and USD. This pair denotes the number of dollars required to buy one pound. For instance, if the GBP/ USD exchange rate is 1.34000, it means a trader requires $1.34 to buy a pound. According to British financial experts, traders need to invest in their knowledge instead of running after the monetary gain. When it comes to trading GBP/USD at Tixee, here is what potential traders need to know:
- Learn much more about strategies to incorporate into the market and best time to day trade.
- Practising is key. So, opening a demo trading account at first is advisable as it lets one become accustomed to the market.
- Beginners should consider trading with the lowest prices.
- Check out the most popular forex pairs here.
Why Trade the GBP/USD?
- Popularly known as the cable, the GBP/USD is among the world’s oldest currency pairs, considering how essential the two countries’ economy is to the world’s economy.
- As one of the major currency pairs, it boasts ample liquidity for investors to easily buy and sell at tight spreads.
- This pair comes with a high level of implied volatility, which lets investors realise a much better profit potential.
- In the list of the top 5 reserve currencies globally, the UK has the 2nd best interest rate after the US.
Factors Impacting the GBP/USD
- The Health of the US and UK Economies Financial experts measure economic health using economic indicators, such as retail sales, GDP, consumer confidence, purchasing manager’s indices, employment number, inflation and other data releases. The differences in these indicators can lead to competitive exchange rates or bad exchange rates in the currency pair.
- Monetary Policy The monetary policy difference between the federal reserve and the Bank of England, especially the timing and speed at which the two central banks increase or decrease interest rates, affect this pairing.
- Fiscal Policy Simply put, an increase in expenditure and taxes impacts the competitiveness of the two countries’ economies.
- Share Trading The hunger for the UK and US shares in one country experiences a substantial demand relative to the other, directly affecting exchange rates.
- COVID-19 Vaccine Rollout More recently , the success of a country’s vaccine rollout affects trading of the major currencies. For example, the GBP/USD is trading well in the foreign exchange markets because Britain is efficiently rolling out the coronavirus vaccine.
- Major Political Events Brexit impacted the GBP to USD rate greatly as the news concerning the new trading relationship receded and flowed. The relationship between the UK and European Union will continue to affect the pound and exchange dollar rates.
Who Invests in the GBP/USD?
- Investors with a long-term view on a range of currencies.
- Traders or speculators who long for profits from the short-term price fluctuations.
- Commercial hedgers, both exporters and importers.
- The central banks when intervening in the forex market or adding funds into their forex reserves.
How do Forex Pairs work?
Initiating a trade in the foreign exchange industry is effortless because the applied trading technique is similar to that used in other financial markets like the stock market. The main aim of trading in forex is to exchange one currency for another, expecting the price will rise. In simple terms, the currency a trader buys will be more valuable than the one on sale. For instance, the USD/CHF defines the Swiss francs required to buy a single dollar. The best way to remember currency pairing necessitates reading it from left to right. The left-side represents the base currency, while the right one denotes the quote currency.
Base Currency and Quote Currency
Here is an explanation of the GBP against the USD: GBP/USD = 1.31229 In this pairing, the left side of the ‘/’ denotes the base currency. It’s named the base currency or transaction currency because it is the exchange rate’s reference point. The right side has the counter currency, which is known as the quote currency. The exchange rate is 1.31229, which shows that a trader has to pay 1.31229 USD for every pound and vice versa. Ideally, one should either buy or sell the currency pair because it’s impossible to buy one currency without selling the other one. So, when buying the GBP/USD, one is buying the GBP while concurrently selling the USD. When selling this pairing, one is selling the GBP while concurrently buying the USD. Basically, when buying a currency pairing, a trader expects that the transaction currency’s value will increase while the counter currency value depreciates. Forex investors have a unique name for this price action trading pattern, and they refer to it as going short when selling and going long when buying.
What is Going Long and Short?
Buying or going long means the traders expect the transaction currency’s strength to increase as the counter currency decreases simultaneously. When going short, on the other hand, investors expect the base currency’s value to decrease as the counter currency increases concerning one another.
Trading Strategies to Use
- Carry Trade It is a popular GBP/ USD trading strategy to use in the forex market. By using this strategy, an investor buys a high-yielding currency and sells a currency at a low-interest rate. The main objective of this technique is to benefit from pips profit, which can be high due to account leverage.
- Ideal Trading Techniques Traders should expect high volatility and volumes during the US and UK trading sessions, especially after the economic data release. It’s reasonable to say that the strongest trading occurs after the release of this data, such as spending, market sentiment, consumer inflation, bank rate, balance currencies, interbank rates, manufacturing production, financial institutions forecasts, and above all, central bank policy.
- Trading Fundamentals If trading forex, traders need to use genuine exchange trading approaches like proactive, reactive and mixed. The proactive technique requires initiating a position before data release and using forecasts to make trading decisions. The reactive approach means investors enter the market after the data release. Lastly, the mixed approach combines the two.
- Technical Trading Here is where breakouts from a narrow range trading method come in handy. Think about a scenario where the price’s current rate moves within a tight range, and in another scenario, the price increases a couple of times the original size. Professional, larger traders often take advantage of the tight ranges because it illustrates a substantial move is imminent.
The Best Way to Profit from GBP/USD
Risk management is crucial in ensuring one makes money in forex while on the right track than when on the wrong one. This way, it’s easy to identify when to decrease risk, take much more risks and when to exit trades. At any particular moment, investors should know when to initiate trades and the direction the price of the currency in exchange will move. Failure to have a way to exit a trade makes it hard to realise a good return on investment.