GBP/USD currency pair is a popular instrument for trading in the Forex market. It takes the third line by efficiency and popularity.
The pair has a high rate of volatility - its intraday fluctuations reach 200 points, and this is provided that the news background is relatively calm. If the market gets excited by some very important news concerning the UK or the USA, the volatility can easily reach 500-600 points during the day. This property makes it one of the popular trading instruments among scalper traders.
So, today we will turn to the main stages of the GBP history, will learn how to trade the GBP/USD, what drivers move the currency rate, will discover when is the best time to trade GBP/USD and will go through a trading strategy to boost your performance.
History of the GBP/USD
The pound for many centuries was the most reliable and solid European currency, and on a global scale was finally squeezed by the dollar only after the Second World War. The political and financial power of Britain also partly stemmed from the Kingdom's careful treatment of its currency. Not surprisingly, the British Empire was one of the first to move to the gold standard, first, however, purely for domestic use.
GBP/USD History After Bretton Woods
This package of agreements, signed in 1944, has become a landmark in the history of money and the world economy. The Breton Woods agreements, among other things, established a strict exchange rate between the pound and the dollar: 1₤ equated to $4.03.
At the end of the Second World War in the UK, the economy left much to be desired - the consequences of the confrontation with Hitler were affected. The United States, on the contrary, strengthened its position. All this led to the fact that the pound quickly lost its status as the most important currency. And already in 1949, the British authorities had to make a serious downward adjustment of the rate - the pound began to cost only $2.80.
In the sixties, there were new serious prerequisites for changing the value of the British currency. It was traded on the stock exchanges in decline, and then the authorities put the national currency under stricter control. In particular, restrictions were imposed on the export of cash in pounds abroad (no more than at 50₤ at any one time).
In 1971, Britain finally adopted the ten-digit system - that is, the pound was equated to 100 pence instead of 240, as it used to be. And so, on the new small coins until 1982, the word "New" was minted in a prominent place, which allowed to distinguish them from the old ones.
In mid-1972, a "free-floating course" regime was introduced, and it is still observed by the British authorities today. That is, the value of the pound began to be determined only by inflation and trading on foreign exchange markets. However, the consequences of the transition to a floating rate in the short term were not very good: in 1976, the pound fell again slightly.
And the lowest rate was recorded in February 1985 - the pound was equal to $1.05 that month. On the other hand, in the early nineties and mid-twenties, there were periods when the pound was worth more than $2 (and was the most expensive currency on the planet).
GBP/USD Intervention: the ERM and Black Wednesday
On September 16, 1992, the British pound was devalued under pressure from international currency speculators and flew out of the European currency mechanism. This episode cost the British government 3.3 billion pounds, and the George Soros Foundation "Quantum" earned over a billion dollars in a few days.
In September 1993, the pound was undoubtedly overrated. Its rate was then almost 2 dollars, which caused great damage to British exports. By the way, Meanwhile, the Bundesbank was raising interest rates in Germany, as the consequences of the reunification with the GDR led to an inflationary spike. In the currency system, in which the pound was tied to the German mark, it was, on the contrary, very low. The pound was thus between the two fires, and there was little enthusiasm in England about the European monetary union, i.e. the euro project, which was just beginning to emerge. Soros, undoubtedly, understood that the pound was unstable and that the speculative attack on it should have been successful. His foundation was one of many who speculated against the pound. It's just that his position, worth $10 billion, was the biggest. Moreover, Quantum intended to increase its size by another $15 billion.
If the government of John Major, then British Prime Minister, had raised interest rates to 50% and expressed its intention to protect the pound to the last, the Black Wednesday for the Bank of England would have been Black Thursday for Soros. By the way, in February 1994, "Quantum" lost $600 million in positions against the yen.
GBP/USD During the 2008 - 2009 Financial Crisis
The fall of the Pound was a record for the last 37 years in 2008. The reason for the collapse was the reports that the Bank of England intended to lower the base rate due to the threat of an economic slowdown.
On the morning of August 15, the pound fell by 0.7% to $1.8561 in the international market. During the week, the British currency fell by 3.4%, while in August - by 6.4%. The pound against the dollar was at its lowest level in the previous 22 months. The British economy came close to a recession in 2008. Economic growth fell to 0.4 percent or 2.5 percent year over year in the first quarter of 2008. By 2009, growth was expected to fall further to 0.1 percent per quarter.
At the same time, due to the fall in tax revenues, the budget deficit has reached its highest level since the Second World War. The budget deficit was to significantly exceed 43 billion pounds sterling, which is 4 percent of the country's GDP. That was the largest deficit level among all developed countries at the time.
Brexit hits the GBP/USD Exchange Rate
As we all remember, June 23rd, 2016 was a significant day for the UK - 51.9% of the UK population voted to leave the European Union (Brexit). Financial markets were the first to respond to this decision. The British pound at the moment collapsed by 10% (to the level of $1.36 - the lowest value since 1985) and dragged along raw materials, stocks and currencies. The euro against the dollar collapsed by 3%, which was the maximum fall since the introduction of the euro.
European and Asian stock indices dropped: English FTSE fell by 4.5%, DAX - by 7.3%, Japanese Nikkei - minus 7.92%, Chinese Shanghai Composite - minus 1%. The large banks were heavily hit, with HSBC shares collapsing by more than 10%. Commodity instruments collapsed. Brent fell by almost 5% to $48.3 per barrel, while Bloomberg Commodity fell by 2%.
The UK officially left the European Union at 23:00 GMT on January 31 2020. The transition period will last until the end of 2020, during which the parties will conduct trade negotiations. The Brexit was held 3.5 years after the referendum.
The Sterling Flash Crash
The Flash crash collapsed the pound by 6%. At the beginning of trading in Asia, the pound fell to $1,1841, which is the lowest figure since March 1985. The pound collapsed immediately by 6.1%, which is the biggest decline since the announcement of the results of the referendum on the UK's exit from the EU. Traders say that the situation was exacerbated by technical failures, known as the flash crash. In Asia, the pound fell to $1.1841, which is the lowest level since March 1985. Some traders blamed the fall for a human error, or so-called "fat-finger" effect, while others noted that the algorithmic trading effect worked with low liquidity.
How Does GBP/USD Trading Work?
The base currency in this pair is the British pound "GBP", and the quoted currency - dollar "USD". The currency pair operates on the following principle: the pound begins to strengthen as the rate rises, and at this time the dollar begins to lose its position. The quote of the pair is direct, and many people consider them to be in the group of "major".
The British pound is considered the most aggressive currency in the financial market - it allows creating increased volatility in the pair. Therefore, you can observe unpredictable behavior and quite false breakdowns of support and resistance level for GBP. To correctly recognize the favorable moments for a position while trading at Forex, it is necessary to make an accurate forecast of GBP/USD.
It is important to understand that the forecast is made with accuracy, but it is necessary to conduct additional analysis on your own to be sure in the correctness of the signal.
The GBP/USD currency pair has a ticker that is identical to its name. Most forex brokers have this asset in their arsenal, so there should not be any problems with finding this tool.
The minimum lot is 100 000 GBP.
Taking into account the pair dynamics and its predisposition to long trends, you should use the Moving Average indicators in combination with power indicators, the most relevant of which are RSI.
This indicator helps to determine the direction of the trend based on averages of values for a certain time, as well as to predict the moment of a trend reversal. Crossing the moving average from top to bottom is a signal to open a sell position, and when the chart of the pair crosses the SMA from bottom to top, it indicates an uptrend, and therefore, an advantageous moment for buying. It should be remembered that highly volatile pairs are difficult to predict, therefore, beginners are not recommended to use such assets, as the risk level is much higher than in the case of pairs, whose volatility is classified as low or medium. To determine the price levels of support and resistance on the currency pair successfully operates indicator Ichimoku. Also, as an alternative to the RSI indicator can be used Stochastic, which determines the oversold and overbought levels in the currency market.
What Creates Volatility in the GBP/USD?
Sharp fluctuations of the pound sterling against other currencies in Forex make it an object of increased attention of currency traders, especially those focused on short transactions, as it allows you to get high profits in the short term. Due to its high profitability pound sterling is considered one of the most attractive currencies for playing on interest rate differentials.
To understand what creates volatility in the GBP/USD, we must go through the main factors affecting the rate.
The news from the UK has a tangible impact on the course of the pair.
It is a country with one of the most powerful economies in the world, which has recently been under pressure from Brexit. Forex participants are closely watching everything that is going on in Britain, and it is especially important to be able to work with the economic calendar, which publishes regular reports on the state of the British economy. Among the most important indicators are:
The meeting of the Bank of England and its interest rate decision. Monetary policy has a direct impact on the value of the national currency. When the rate rises, the pound strengthens, and lower rates weaken the sterling.
GDP (published once a quarter).
The consumer price index, or simply put - inflation.
Employment and Unemployment.
Real estate market data (housing in this country is one of the most popular in the world).
Trade balance.
As a rule, all these reports are published during the European trading session, when the London Stock Exchange opens. But do not forget to also keep track of the data from the U.S., because they also can have a significant impact on the GBP/USD rate.
It is these indicators allow analysts to make correct predictions, and traders get additional and significant income. If you have recently entered the Forex market, trading with the GBP/USD currency pair will seem difficult and inefficient. It takes years of training to perform your analysis. It will also take a long time to analyze the entire market. Therefore, the best option will be information from professional analysts who generate data on specialized sites.
Check the GBP/USD Calendar While You Trade
The Forex Economic Calendar was created to help traders make the most accurate forecasts and take timely and well-considered actions.
Before the release of the event, the user is only open statistical data on last year's indicators, forecast quotes. The main values of this year are published after the information is updated. Based on the date of publication of the news, information about the indicators of the same and the current periods, a trader compares forecasts of famous analysts and can make his forecast after all the received reviews.
How to trade the GBP to USD on the news and what to pay attention to
Any macroeconomic calendar has certain parameters. First of all, you should pay attention to the currency to which the news refers, in our case it`s GBP. Generally, there are daily publications on almost all the so-called majors. In the trader's economic calendar, they are indicated either by country flags or currency symbols (for example, EUR, GBP, USD).
It is also important to pay attention to the time in which the publication is released. This way you will know exactly when to trade or, conversely, not to trade a particular currency. In the calendar you can set the time zone yourself.
Further, you should pay attention to three indicators - the previous value, the forecast, and the current value. Before the release of a particular index, you can see only the previous value and the forecast from experts. Accordingly, even before the news release you can compare the forecast and the previous value and draw certain conclusions.
However, we do not recommend you to build a strategy on this, because often the final value does not coincide with the forecast and then the market starts to fluctuate significantly. In other words, it is best to try to open the trade when the news is published.
What is the Best Trading Account for GBP/USD?
Needless to say, choosing the best trading account for trading any assets, left alone GBP/USD, is the most important decision on your path of a trader. This choice has a crucial effect on your would-be wins and losses, it should it treated with due diligence. Taking into account that there is a lot of different types of traders, with various approaches and skill level, trading accounts vary from broker to broker.
PaxForex offers 4 types of accounts, tailored as per clients` needs, capital, and trading strategies. The most popular is the Standard account, with which you get:
Min. Spread: 0.4
Personal education: +
Account currency: USD, EUR, GBP
Max. leverage: 1:500
Min. volume lot: 0.1
Max. lot size: ∞
Markets to trade: Forex (with GBP/USD being one of them), Cryptocurrencies, Shares, and Commodities.
The MT4 Trading Account
The trading terminal is the main tool of any trader, which is a software for fast interaction between a trader and broker for performing various operations. One of the most popular trading platforms today is MetaTrader 4. Everything necessary for trading, many traders find exactly in this trading terminal.
MetaTrader 4 is a convenient and clear platform for trading in the forex market, performing trading operations, technical analysis using indicators, testing trading systems, and working with Expert Advisors. And for smartphones on Android and IOS developed mobile applications that provide continuous access to trade.
The MT4 trading platform is now the most popular and undoubtedly the leader among trading platforms. The set of terminal functions can satisfy any traders' demands. And it fits both beginners and professionals.
GBP/USD Technical Analysis: Learn when to buy the GBP/USD, or sell
Since we have already gone through the most important points of the Pound history, discovered the main economic events that impact the rate and, what is more important, have settled the best trading account for GBP/USD it`s time to dive deeper into the waters of GBP trading.
Let us now have a look at the technical side of the analysis and consider when is the best time to trade GBP/USD.
Technical analysis assumes that by studying price changes in the past, one can predict future price changes. As the forex market operates 24 hours a day, there is a huge amount of various data with which to calculate future price changes in GBP/USD, thus increasing the statistical accuracy of the forecast. All this makes the forex market an ideal platform for traders who prefer to use technical analysis tools such as trends, charts, and indicators.
As for the methods of technical analysis, we can outline 4 types:
Classic analysis - defines variants of price changes by drawing various lines and figures on the price chart.
Indicator analysis – use of mathematical functions called indicators.
Volume Analysis - implementing the volume of positions open in the market.
Candlestick Analysis - based on combinations of Japanese candlesticks.
Each of the methods of technical analysis is based on the fundamental postulates and tries to determine the balance of forces between buyers and sellers, as it is this balance that ultimately shows whether the price of GBP will rise, fall, or stay in place.
It's worth noting that it's the wrong approach to select one method and follow it only. The fact is that each of the methods has its strengths and weaknesses. Therefore, the right way for beginners is to learn all the nuances and combine the main methods of technical analysis in the right proportions.
Even though the asset is traded 24/5, the fundamental volume and movement are commonly observed in the London Morning beginning at 06.00 GMT, which lasts through to 16.00 GMT due to the opening of New York trading at 12.00 GMT. After that, movement each hour begins to decrease, so there are likely to be less significant price fluctuations day traders can take advantage of.
Day traders should ideally trade between 06.00 and 16.00 GMT. Trading other hours, the price change may not be big enough to compensate for the spread paid at the opening of the position.
Volatility changes over time. For instance, daily mediocre volatility at the time of writing is 150 pips per day. The daily average movement could rise to 800 pip per day, meaning each hour is possible to see a somewhat higher pip movement.
With that we can study issues ahead and try to expect potential market fluctuations that could be provoked by beneficial or unfavorable economic reports published in the UK or USA.
How to Buy and Sell the GBP/USD
Buying and selling currencies in the forex market require learning and knowledge of many technical terms.
Buying and selling currency pairs includes an assessment of the increase/decrease in the value of one currency against another. This may include fundamental or technical analysis as the basis for trading. Once the basis is formed, the trader will turn to other technical and fundamental aspects. Key entry and exit levels will be followed, taking into account risk management processes.
When we should sell:
Falling currency is indicated by economic data.
Stop Loss order against Take Profit is at the close support level.
The price is significantly below the strong resistance level.
When we should buy:
The growth of the rate is predicted by economic data.
Stop Loss order against Take Profit is at the close resistance level.
The price significantly exceeds the support level.
Once you are done with the analysis and by now have a clear picture of where the price will go, the only thing left to do is to place an order on your MT4 trading account. Here is how it is done:
For you to open an order you can a) click on the ‘New Order’ icon on the toolbar, which opens up the MT4 order window, or b) right-click on the GBP/USD chart, select “Trading” and choose the appropriate selection.
On the window appeared, type the volume of the trade, where the minimum is 0.1 and 1 lot equal 100,000 units.
Define the Stop Loss level. It is done to limit the risks in case the market moves against your plans.
Type the Take Profit level. It helps to collect the expected profit and allows you not to monitor the chart the whole day.
Now hit either "Sell by Market" or "Buy by Market", whatever your analysis told you.
You can also view your executed order in the “Terminal” section of MT4.
A GBP/USD Trading Strategy
The trading strategy Big Ben uses the currency pair GBP/USD and time interval M5. The strategy is an intraday one. The recommended operating time is 06.00 GMT. Trades are opened seldom, but bring considerable profit (from 100 points).
The Big Ben strategy is based on a system that takes into account the peculiarities of closing of the one market and opening of another. Following the fact that Forex trading continues around the clock, but at certain times different markets (exchanges) operate.
According to Big Ben's strategy we are trying to catch the first intraday market movement, which takes place in the first few hours after the opening of trading in Europe (Frankfurt and London) at 06.00 GMT. Frankfurt opens at 06.00 GMT and the London Stock Exchange at 07.00 GMT. The movement momentum is important, first of all, for the British pound, because with the closure of the London exchange, the volume of trade in the pound is tapering off. Accordingly, with the opening of the London Stock Exchange, we get a "real" opening of the market and increase in trading volumes of the British pound, rather than other currencies, which are distributed on other exchanges. This is the starting point of this strategy.
How to open a short position:
As soon as the exchange opened in Europe, we need to check if the new minimum for the currency pair GPB/USD has been formed. The extremum should be at least 20-25 points below the Open Candlestick.
After that the price goes up, crosses the opening price - the upper limit of the range is formed. It must be at least 20-25 points above the Open Candle. In other words, the range of price fluctuations from 50 points and more is formed.
Then we see the GBP/USD reversal down again and the price goes to the lower level of the range.
We should sell on a breakdown when the price has passed 7 pips or more over the lower level of the formed range.
It is better to place the Stop Loss no higher than 40 pips from the entry point.
When the price has passed down the distance equal to Stop Loss value, 50% of the trade should be closed, and Stop Loss for the other half of the trade should be transferred to the opening point (break-even). Further you can observe the opened position or use a trailing stop.
Conditions are mirror-symmetrical at the opening of a long transaction.
What is the Big Ben trading strategy based on? As mentioned above, trading on GBP to USD forex takes place in much smaller volumes at a time when London and Frankfurt exchanges are closed. Volumes are increasing significantly during the European session, which allows you to see the overall picture of the supply/demand ratio for this pair, or, more precisely, the British pound.
As soon as the exchange opens, market participants with large capital move the price so that the pending stop orders (Stop Loss) trigger, which is above and below the current price (opening price), thus forming intraday extremes (highs and lows). After the execution of these orders, the market is moved by the initial momentum, exactly the one that a trader using the strategy of Big Ben tries to "catch".
Opportunities on the GBP/USD Forecast for 2020
Keeping in mind that the latest GBP/USD price chart looks nothing but volatile, and both Brexit and the US-China trade war show no sign of termination, traders from all over the world are wondering: what are the prospects of the British Pound?
Now, the British currency seems to be far from being stable, remaining under the pressure with the endless Brexit concerns.
Analysts from Rabobank claimed that “the voters may have given PM Johnson a majority in the House of Commons hoping that he could finally through with Brexit, but trade negotiations between the UK and the EU will control much of the domestic political aspect.”
They also added that should “talks be difficult a ‘no deal’ Brexit would still be a prospect for the UK at the end of 2020. This could bring strong downside potential for GBP.
Aside from resumed Brexit indecision, traders should also monitor carefully the UK economic fundamentals. The latest reports have been showing that the country’s economy is slowing down.
However, if the descending trend lasts, it will set the stage for rate cut considerations and might bring some additional pressure on the British currency.
Therefore, the fundamental background for the pound remains quite negative, massively affecting the GBP/USD forecast. Nevertheless, sterling is not the only currency to be considered when trying to make pound to dollar predictions. When analyzing the market situation for further trading, remember to keep an eye on the fundamental factors from the USA.
As per Longforecast.com, a popular forecasting firm, the GBP/USD is foreseen to trade in the range of 1.288-1.344 by December 2020.
Another service known for its realistic forecasts, Walletinvestor.com, has taken a short position, citing the GBP/USD pair as a potentially “bad, high-risk one-year investment option”. Studying their summary, traders might consider short positions, with the GBP/USD rate dropping as low as 1.27 in one year.
Wrapping up the GBP to USD Forex forecast 2020, the pair is expected to have a price uptick in the first half of the year before entering into another downtrend.
Why trade the GBP/USD with PaxForex
Here are some reasons why you should trade with PaxForex:
10 years of stable work on the Forex market is the main argument of PaxForex reliability.
Cent and standard accounts in 3 currencies (USD, EUR, GBP).
More than 10 ways to deposit and withdraw funds: Visa, MasterCard, bank transfer, payment systems, crypto wallets.
Competitive spreads.
A wide range of trading assets, including currencies, shares, commodities, and cryptocurrencies.
The security of client funds is ensured by their storage on segregated accounts.
Trading on the computer, smartphone, and tablet via platforms Trading on margin: providing trading on margin (500:1), PaxForex gives you access to the GBP/USD pair with the help of CFDs.
