Introduction to the GBP/USD Currency Pair
The British Pound to USD currency pairing is often called the Cable by investors and is one of the most traded pairs within the Forex market. Due to this, it is one of the most cash rich and liquid pairs, and this liquidity is essential to allow traders to take advantage of variations and adjustment in prices. The GBPUSD pairing has quite a wide price range when compared to other currency pairs as it is quite unpredictable and impulsive. This leads to greater volatility in this market which in turn results in higher spread quotations from brokers. The GBP USD pairing makes up around 85% of all currency cross rate trades that are taking place at any one time, and according to a BIS survey, this pairing is the third most commonly traded pairing taking up a total 14% share of daily trading volume. Because of this pairing’s volatility and unpredictable nature, it is known for its many fake breakouts, wild movements and false alarms. This means that this pairing is best suited to more experienced investors and those who are novices should avoid trading these currencies. The GBP/USD pair tends to have larger movements when compared to pairings such as USD/JPY and EUR/USD and therefore can be quite risky, although of course, the profits in trading it are also exponentially higher.
Characteristics of the British Pound to USD Pairing
The average spread for the GBPUSD pairing is usually around 3 to 5 pips, with the daily range averaging out at around 150 to 200 pips. Most traders prefer to trade this currency pair during London trading hours i.e. between 7am GMT and 5pm GMT or during the period when the New York Stock Exchange is open for business. The rate of the GBP USD pairing is affected by the interest rates set by the Bank of England and the Federal Reserve. The most popular trading style for this currency pairing is either swing trading or day trading, and experienced investors will expertise in either of these styles stand a chance of making an excellent profit. There are numerous ways to trade the GBP/USD pair and using technical and fundamental analysis techniques allows traders to make more accurate trading decisions. It is important, however, when trading this pairing to pay close attention to false breakouts and to avoid falling prey to such false alarms. It is also essential to watch out for any releases of economic data which will make the pair move strongly in one direction.
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Factors Which Influence the GBP/USD Exchange Rate
There are several factors which influence the exchange rate between the British Pound and US Dollar. These include:
- Import and Export flow between the two countries
- Capital flow between the USA and the UK
- Rate of inflation
- Limits set on exchange rate fluctuation by either governments
- Trade balance on services, goods and merchandise
- Inflation rate and both long and short term interest rate disparity
- Relative growth
- Borrowing costs
Information About the British Pound Sterling
The Pound Sterling is the world’s oldest currency and was first introduced in 1158 by King Henry II. Coins of that time were made from silver and were called Sceats, however the Pound Sterling came into being in 1560-1561 when Queen Elizabeth I introduced a new currency to tackle the inflation which the country was experiencing. The Pound was a stable and strong currency, even standing the test of civil war. By the end of the First World War, the UK’s economic outlook had changed, as fluctuations and instability took over. The gold standard was adopted and approved in 1925 but the depression of 1930 saw another financial crisis with devaluation in the currency and a turndown in the market. After many efforts were made to strengthen the currency, decimalisation occurred in 1971. This broke up the pound in 100 pennies, whereas in the past 240 pennies had made up one pound. Pound notes have been a form of legal tender for over 300 years and are available in £5, £10, £20 and £50 denominations. Responsibility for minting the currency belongs to the Royal Mint, however the Bank of England is the country’s central bank and prints the notes to be used in England. The UK economy is the 5th largest in the world as measured by GDP and 9th largest when measured by PPP. The UK is also the 9th largest world exporter of goods as well as being the 6th largest importer and is one of the most globalised economies in the world. The UK economy is dominated by the service sector, with the financial services industry being especially important. The nation’s aerospace industry comes in 2nd place and the pharmaceutical industry is close behind as is the automotive industry. The UK economy is also boosted by its gas and oil production from the North Sea.
The US Dollar and the United States Economy
The US has the largest national economy in the world in nominal terms, and it is also the 2nd largest according to PPP. The United States represents 17% of gross world product, with the country’s GDP being around $17 trillion. The USD is the world currency that is traditionally used for the majority of international financial transactions and it is also the foremost reserve currency among international banks. As well as the United States itself, numerous countries also use the Dollar as their currency and many more smaller nations peg their currency to its value. America has a mixed economy with a stable rate of GDP growth, a moderate rate of unemployment and high levels of capital investment. The country also has plenty of natural resources, high productivity as well as a developed infrastructure which has led to it being the largest national economy in the world since the end of the 19th century. The United States is the globe’s biggest producer of natural gas and oil and is the second largest world manufacturer, being responsible for a 5th of the world’s manufacturing output. There is also a dominant trade in services, with 128 of the world’s biggest 500 companies being headquartered in America.