Trading in the GBP/USD!
GBP/USD

Analysis of the price of the currency pair GBP/USD

Trading in the GBP/USD!
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The GBP/USD currency pair, or sterling pound dollar, is currently one of the most traded currency pairs on the foreign exchange market. This is therefore obviously one of the most important currency pairs on the Forex market in terms of liquidity, closely behind the EUR/USD. But what does this currency pair actually represent and, in particular, how does this exchange rate function and how can it be correctly analysed? This is what we shall explain here in this article dedicated to this currency pair on the foreign currencies market.  

Elements that can influence the price of this asset:

Analysis N°1

The economic health of these two countries. It is clear that the strength of demand in the sterling pound or American dollar will depend greatly on the appeal of their respective economies. A growth or economic crisis in the United States or United Kingdom could therefore lead to a rise or fall in this currency exchange rate by favouring or disfavouring the GBP or USD.

Analysis N°2

The monetary policies of these two countries are also major factors to take into consideration when completing a fundamental analysis. Concerning the United Kingdom, it is the BOE, or Bank of England, that meets monthly to publish a report summarising its monetary policy which should of course be followed and their decisions taken into account. For the United States, the central bank responsible for monetary policy is the Fed, or American Federal Reserve. These entities can exert a significant influence on the interest rates of the sterling pound or American dollar through a rise, a drop or even by leaving it unchanged which will therefore affect the taking of positions by investors in these two currencies.

Analysis N°3

The overall economic policies of these two countries should also be closely followed as political events can at times lead to significant fluctuations in the Forex market. This can notably be observed during the different steps that led towards Brexit but can also change due to elections or referendums, changes in party politics or other events of this type.

Analysis N°4

Finally, we would also follow the general data and economic figures concerning these economies.  The economic announcements are frequent here and carefully scrutinised by investors in the GBP/USD who are constantly watching for announcements that will influence this currency exchange rate. Certain significant figures are also published regularly such as retail sales, employment figures and inflation figures.

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General presentation of the GBP/USD currency pair:

The GBP/USD is in fact the currency exchange rate on the Forex market between the pound sterling and the American dollar. To summarise, this currency pair represents the foreign currency exchange rate of a single sterling pound in American dollars. Generally this currency pair is called the ‘Cable’ or ‘Sterling’.

The quotation of the GBP/USD currency pair is expressed, as with other currencies, in pips or tenths of pips with certain brokers. Historically, we note that the Cable rate has varied over the last twenty years in a band of between 1.40 and 2.10 pips. Its highest rate was in 2007 but the pair rapidly lost value due to the ongoing economic crisis which actually began in 2008. It is during this period and due to the financial crisis that the pair reached its lowest rate of 1.40 pips.

Many traders use the Cable to trade on the Forex as the indicators that enable the forecast of its movements are numerous due to the popularity of the American dollar and the particularities of the British Pound.

 

What does the GBP/USD currency pair represent:

The GBP/USD is a currency pair on the foreign exchange market, or Forex, that is also called the Cross and represents in this case the exchange rate of the sterling pound expressed in American dollars.  The base currency of this pair is therefore the British currency, the sterling pound, and its counterpart is the American currency, the U.S. dollar.

To summarise, we can therefore say that the GBP/USD currency pair represents and indicates the amount of American dollars that are required for the purchase of a single sterling pound. It should in fact be remembered that the base currency of a currency pair is always situated to the left and its counterpart is always to the right of the currency pair quoted.

As an example, and to better understand what the GBP/USD currency pair represents, let us imagine that the value of this pair is 1.25 pips. This means that it is necessary to have 1.25 American dollars to buy a single sterling pound.  However this also means that if you sell a single pound sterling you will theoretically receive a payment of 1.25 American dollars.

As we shall examine in detail later on, the rate of a currency pair such as the pound sterling and American dollar changes continuously according to supply and demand on the foreign exchange market. This is why the GBP/USD is also a speculative asset for a number of investors.

 

Operation and quotation of the GBP/USD currency pair:

Now that we have presented the GBP/USD currency pair we shall look at the more technical side by examining the quotation for this currency pair and its function and operation on the foreign exchange market.

In fact, as you have probably already remarked upon, and as is also the case for other assets that can be traded online, the quote for the GBP/USD currency pair on the brokers online platforms presents two values, not a single one. These two rates on the stock market for this currency pair are called the ‘ask’ and ‘bid’ rates, or the buying and selling exchange rates. The values of these two rates are constantly changing.

It should also be noted that the quotation for a currency pair represents a specific measureable unit called a ‘pip’. Here, a ‘pip’ represents 0.0001 of the quoted price. Therefore, when the rate of the GBP/USD currency pair changes from 1.25100 to 1.25101 we say that the observed movement is 1 pip.

So why does this double quotation exist? In fact, the ‘ask’ and the ‘bid’ prices represent the price difference which is called the ‘spread’.  For example, when the GBP/USD quotation is noted as 1.25100 – 1.25115 this means that the spread is 1.5 pips. We would note here that in the example given, the last number of the quotation, the fifth decimal place, is used only by trading software in order to provide the most precise rate possible.

The spread displayed for the sterling pound American dollar currency pair is above all used for calculating the brokers’ remuneration.  It is in fact this difference between the buying price which is slightly higher to the real price and the selling price which is slightly lower to the real price, that generates a form of margin for this intermediary.

This notion of spreads is important to understand and take into consideration as a spread can be fixed or variable depending on the broker and, when it is variable, can change several times during a single trading session depending on the volatility of the market or the trading hours with the spreads often low during the market opening hours relating to the GBP/USD, this means the American market opening hours and those of the European markets.

 

Follow an economic calendar for analysing the GBP/USD:

As we have just examined, a fundamental analysis of the GBP/USD currency pair is completed through the knowledge and understanding conveyed through various economic, political and financial publications and announcements relating to the United States and the United Kingdom economies. To follow this information in real time investors on the Forex regularly use an economic calendar.

This calendar is in fact an agenda, available online on a number of specialised websites on the financial markets and the Forex that enable you to know in advance the dates and events to follow. For example, in this calendar we find the dates of the meetings of the Fed and the BOE, the major expected publications and announcements for these two economies as well as significant anticipated political events.

But that is not all! Not only does the economic calendar indicate the major dates, it will also indicate the figures in real time on their official publication and announcement.  It is even possible to programme alerts. Even better! Certain Forex economic calendars also indicate, before the publication, the expectations of analysts relating to future publications and announcements. It is now possible to obtain supplementary analytical factors with figures that can be compared with the actual results while ensuring that you take into account the market anticipation phenomena.

Of course, other events not noted in the economic calendar can also exert an influence on this currency exchange rate such as was recently the case with the Covid-19 pandemic which has had a major impact on the British and American economies.

Frequently Asked Questions

Why is the GBP/USD currency pair popular?

The GBP/USD is one of the oldest and most widely traded currency pairs today. The term cable refers to the practice of transferring pound quotes in the 19th century via the undersea cable that crossed the Atlantic. The UK and US have close ties and important trade agreements, which increases the volumes traded between these two currencies. It is also this liquidity that has made the currency pair so popular with traders.

What is the most influential factor in the GBP/USD currency pair?

One of the factors most likely to influence the GBP/USD currency pair at the moment is the decisions that the central banks that control these currencies may make. These are the Bank of England and the US Federal Reserve. The interest rate differential set by these two financial institutions will have a direct impact on Forex trading between these two major currencies.

How to analyse the GBP/USD currency pair?

In order to study the GBP/USD currency pair and its long and short term potential, it is necessary to use several different types of analysis including fundamental analysis which will focus on the most influential past and future events and technical analysis which will study the price patterns.

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