GBP/USD: Pound - Dollar Rate, Chart, Forecast & Analysis
Due to the volatile and unpredictable nature of this pair, it is known for numerous false breakouts, wild moves and false warnings. This means that this pair is better suited for more experienced investors. GBP/USD tends to move more than pairs like USD/JPY and EUR/USD and can therefore be quite risky; although, of course, the profits are also exponentially higher.
Pound Sterling/US Dollar Characteristics
The average spread for the GBP/USD pair is typically 1-2.5 pips with an average volatility of 102 pips per day in 2020. Most traders prefer to trade this currency pair during London business hours, i.e. between 7:00 GMT and 17:00 GMT or during the opening of the New York Stock Exchange. The exchange rate of the GBP/USD pair is affected by interest rates set by the Bank of England and the Federal Reserve.
The most popular trading style for this currency pair is swing trading or intraday trading, and experienced traders with experience in either style have a chance to make great profits. There are many ways to trade the GBP/USD pair. For example, the use of technical and fundamental analysis methods allows traders to make more accurate decisions. However, it is important to pay close attention to false breakouts with a price action trading strategy. It is also important to keep an eye on any release of economic data that will move the pair strongly in one direction.
Factors affecting the GBP/USD exchange rate
The exchange rate of the British pound sterling against the US dollar is influenced by several factors:
- Import and export flows between the US and the UK
- Capital flows between two countries
- Inflation rate
- Limits on exchange rate fluctuations set by any government.
- Balance of trade in services, goods and commodities
- The rate of inflation and the difference between long-term and short-term interest rates
- Relative growth
- Loan price
The pound sterling and the British economy
The British pound is the oldest currency in the world. It was first introduced in 1158 by King Henry II. The coins of this era were made of silver and were called skiats. However, the pound appeared in 1560-1561, when Queen Elizabeth I introduced a new currency to combat the inflation that the country was experiencing. The pound was a stable and strong currency that even withstood the test of civil war.
By the end of World War I, Britain's economic outlook had changed due to fluctuations and instability. The gold standard was adopted and approved in 1925, but the depression of 1930 led to another financial crisis with currency devaluation and a market reversal. After many efforts to strengthen the currency, the decimal was introduced in 1971. Then the pound was divided into 100 pennies or pence, while before the pound was 240 pence.
Pound notes have been legal tender for over 300 years and are available in denominations of 5, 10, 20 and 50 pounds. Responsibility for minting coins lies with the Royal Mint; however, the Bank of England is the country's central bank and prints banknotes for use in England.
The UK economy ranks fifth in the world in terms of GDP and ninth in terms of PPP. The UK is also the world's ninth largest exporter of goods and sixth largest importer, and one of the most globalized economies in the world.
The UK economy is dominated by the service sector, with the financial services sector being particularly important. The country's aerospace industry ranks second, followed by the pharmaceutical industry and the automotive industry. The British economy is also supported by the extraction of gas and oil from the North Sea.
The US dollar and the US economy
The United States has the largest national economy in the world in nominal terms, as well as the second largest economy in PPP terms. The United States accounts for 22% of the world's gross product, while the country's GDP is about 21 trillion US dollars.
The dollar is the world's currency traditionally used for most international financial transactions, as well as the main reserve currency of international banks. Apart from the United States, many countries also use the dollar as their currency, and many other small countries pegg their currency to its value.
America has a mixed economy with stable GDP growth, moderate unemployment and high levels of capital investment. The country is also rich in natural resources, high productivity and developed infrastructure, which has allowed it to be the largest national economy in the world since the late 19th century.
The United States is the world's largest producer of natural gas and oil, and the world's second largest producer, accounting for a fifth of global production. Trade in services also dominates, and 128 of the world's top 500 companies are headquartered in the Americas.
Relationships between currencies
What may not be noticeable on your actual GBP/USD chart is the effect of "Currency Correlations". It might just be an expression you've come across on the forums. Here is the explanation:
Because currencies are valued and traded in pairs, no pair is completely independent of the others. For example, if you are trading the British pound against the Japanese yen (GBP/JPY), you are actually trading a derivative of the GBP/USD and USD/JPY pairs. This means that to some extent the GBP/JPY rate must be pegged to one or both of the other currency pairs.
But while some will develop in one direction, others will develop in the opposite direction. Once you understand this, you can start using this information to your advantage.
Correlation is best thought of as a static measure of the relationship between currency pairs. This correlation can vary from -1 to +1. The first indicates that the currency pairs will move in the opposite direction, while the second indicates that they will move in the same direction. If the correlation is zero, the relationship is arbitrary.
The most effective way to understand currency correlation is to view our real-time correlation chart. It's also helpful to keep in mind that correlations can change over time. This may be the result of monetary policy, as well as economic and political factors.
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GBP/USD Day Trading Strategy
Whatever your trading plan is, whether it's based on weekly reversals and analysis, or 5 years of historical data and averages, all of the strategy points and examples below can be helpful.
There is a common misconception in GBP/USD day trading that since the forex market is open 24 hours a day, you need to listen to your trading platform in order to buy and sell all day long. It just isn't.
Successful intraday traders focus on periods when there is enough volatility and volume to make a profit that exceeds the cost of the spread and/or commission.
You will see spreads widen during relatively quiet periods and narrow during periods of high activity. So while the British pound trades from Sunday evening to Friday evening in the United States, it does spread over certain periods.
The main window shows the UK and US open markets. Thus, the best time to trade GBP/USD is from 08:00 to 10:00 GMT and also from 12:00 to 15:00 GMT. This is where you will find the biggest daily moves and the spreads will not have much of an impact on profits.
Therefore, regardless of your method of spotting support and resistance levels and other signals, trading during peak periods can often offer the best profit potential.
Breakout trading strategy
The GBP/USD currency pair offers many opportunities for breakout trading. However, you should look for a strong risk/reward ratio. For example, risk 25 pips, but if successful, aim for 100 pips.
Make an aggressive risk/reward ratio of 1:4 as above and you'll be right much less often. Also, don't risk too much capital on every trade. Many suggest risking no more than 1-2% of your account balance on a single trade. In this way, you protect yourself from losses and ensure that you live another day in the Forex market.
There is an alternative for those less interested in GBP/USD day trading. Instead, you can trade today's news. You just need to be aware of the events and have a plan of action.
For example, economic reports on the UK unemployment rate, manufacturing growth, consumer sentiment and spending will cause a move.
Google Finance, Yahoo Finance, DailyFX and Bloomberg constantly update the currency market news. If you can react before the rest of the market, you can claim your edge. They also offer all the GBP/USD rates, forecasts and comments you need to evaluate your positions.
In addition, whether your strategy is based on Elliot wave counting or breakout strategies, getting the latest predictions for this week and next will strengthen your position. Most of the information sources mentioned above provide excellent services for this purpose.
Long term forecasts can often provide a strategy or at least unique trades. The main users of the foreign exchange markets use the same long-term forecasts and the same forecasts of the economic outlook. Thus, governments or large corporations that trade currencies do so based on the same forecasts of price movements. This can often lead to self-fulfilling predictions as these larger deals are either all done or all completed.
However, it should be warned that, as always, economists are given too much importance. If their predictions were properly recorded and verified, they might not be as reliable as we think.
To trade the British Pound/US Dollar effectively, you need to understand their tumultuous relationship.
Trading between the two currencies has been around for so long that it is impossible to state the original exchange rate between the pound and the dollar. It wasn't until the early 1970s that the concept of the GBP/USD we know today actually existed. This change was prompted by the move to floating exchange rates in the US and UK.
Prior to 1971, the history of exchange rates was tied to the value of gold. This was the result of agreements reached in 1944 at the Bretton Woods conference. The consequences of these transactions have affected the GBP / USD for almost three decades.
With the collapse of Bretton Woods, the history of the GBP/USD has become more dynamic. The 1980s saw significant price fluctuations between the pair. These fluctuations can be explained by several events that occurred in 1985:
- British scientists have discovered a hole in the ozone layer in Antarctica.
- First mobile phone call made in the UK.
- Miners stop strikes.
As a result of all this, the GBP/USD exchange rate fell from 2.44 to 1.05, which is the lowest ever exchange rate for this pair.
Understanding why these price fluctuations occurred can help you better understand the forces influencing the GBP/USD, which will improve your future investments. So what happened in the United States?
- In the 1970s. there was an increase in the Organization of the Petroleum Exporting Countries (OPEC) and oil prices. However, at the same time, the shortage of oil limits economic growth.
- The 1980s began after a long period of recession in the US economy.
- After the Vietnam War, the unemployment rate was high. In addition, the US Federal Reserve System (Fed) did not take measures to reduce inflation.
The impact of success in the UK and failures in the US has affected exchange rates. As you can imagine, the British pound strengthened against the US dollar.
However, the status quo was restored with the introduction of Reaganomics. One of the main changes was the use of high interest rates to fight inflation. The ensuing tax cuts and military investment quickly brought the US economy back to life.
The impact of all this on the GBP/USD has been significant. By 1985, the US dollar appreciated by 50% against major currencies.
Another important period in the history of GBP/USD relations occurred in the early 1990s. The intervention of the Bank of England (BoE) resulted in one of the largest moves ever seen in the history of this pair.
The Bank of England is supporting the value of the British pound sterling in an effort to keep the pound sterling against the German mark in line with the Exchange Rate Mechanism (ERM). The problem was that the UK was in recession and raising interest rates was an inadequate monetary measure.
It didn't take long for people like George Soros to realize that the Bank of England was in trouble. His answer: sell the pound short.
Black Wednesday came on September 16, 1992, when the UK withdrew from the European Monetary Mechanism and lost hope of supporting the pound. In just one day, the pound lost 25% of its value against the dollar.
All of this helps to highlight the usefulness of historical facts and data for future perspectives and forecasts for the GBP/USD pair.
Crisis of 2007
The next major event in the GBP/USD relationship took place in 2008-2009. But before the global depression of 2008-2009, there was a mortgage crisis. By the summer of 2007, it became clear that a number of major US financial institutions were in serious trouble.
However, the global implications are not yet fully understood, so the British pound sterling appreciated against the US dollar throughout most of 2007 due to a clearly faltering US economy. In November 2007, the GBP/USD exchange rate was 2.1163.
After fully realizing the extent of the damage, the Bank of England began to make significant changes from 2008 onwards. Gradually over time, the Bank of England lowered its interest rate from 4.5% to 0.15% at the time of this writing.
These developments demonstrate the potential impact of monetary policy on currency strength. This knowledge will help you more accurately predict and respond to future events.
Another important milestone was reached with the Brexit decision in 2016. The exchange rates and prices of the GBP/USD pair changed quickly. The value of the pound sterling has fallen against the US dollar and other major currencies.
Against the US dollar, the pound fell from $1.466 to $1.3694 at the time of the announcement of the results and then fell to $1.2232 in October 2016, down 16%. At the same time, by mid-2017, the pound exchange rate stabilized somewhat.
The GBP/USD currency pair, which is one of the most traded in the world, attracts intraday traders from all over the world. However, to take advantage of the crowded forex market, you need to find an edge.
Investing in live charts is never easy. Thus, intraday trading on specific timeframes and using volume will allow you to understand price fluctuations. Using signals and trends will also help you identify promising financial opportunities.