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GBP/USD is the ticker for the British pound to the US dollar exchange rate. GBP-USD belongs to the ‘majors’ group in Forex, which represent the currency pairs with the highest daily trading volumes. Each of the pairs in the majors’ category, feature the USD. Aside from being one of the oldest tradable pairs, the GBP/USD is also very liquid and offers traders significantly tighter spreads than the minors. The GBP/USD currency pair has the pound sterling as the base currency and the US dollar as the quote currency. This means that the price of the GBP-USD at any given time represents the amount of US dollars it would take to exchange for one British pound.
History of GBP/USD
The GBP USD has an interesting history, as it represents currencies that have, at different times in history, been the world’s de facto reserve currency. It is Britain that colonized the United States, and the pound sterling dominated world finance before World War 1 erupted in 1914, with over 60% of global debt held in the currency. The US dollar later caught up with the pound in the 1920s, and by 1944, in tandem with the global implementation of the Bretton Woods monetary system, the British pound became pegged to the US dollar. It was not until the dissolution of the system in 1971 that currencies began floating freely against each other in the markets. Currently, the US dollar is the currency most held in reserve around the world. The pound comes in third, just behind the euro (EUR). The GBP/USD has always been referred to as the Cable, referencing the first transatlantic communication cable that connects the UK and US, and which was used to transmit exchange rates between the countries.
Highs and Lows
Since the GBP-USD started trading, it has had major highlights in its history. In 1992, on 16th September, a day referred to as Black Wednesday, the GBP/USD tanked 25% as Britain left the European Exchange Rate Mechanism. A more recent highlight would be the 2016 Brexit vote that ensured Britain’s exit from the European Union. The GBP/USD lost over 10% in one day after headlines came out that the UK had indeed voted to exit the EU. Aside from those highlights, GBP-USD has historically hit all-time highs of 2.466 and all-time lows of 1.05. All these extremes were posted in the 1980s. During the 2007/08 global financial crisis, the pair hit highs of 2.11 and lows of 1.426.
Bodies Influencing the GBP/USD
Monetary policy is a major factor influencing the GBP/USD as proven by one of the major highlights of the pair. In the UK, the Bank of England releases rates every month. It is vital to point out that the BoE does not follow up with a rate statement when it maintains interest rates, but will do so when it either hikes or cuts the rates. As for the US, the Federal Reserve will release rates eight times a year; and with the US dollar being the world’s largest reserve currency, the eight dates are very important for the markets.
Employment numbers are also very important for both economies, as they usually guide monetary policy for the Central Banks. Both the US Bureau of Labor Statistics and the UK Office of National Statistics release employment figures monthly. The figures usually spur much volatility on the GBP-USD pair. Furthermore, the GBP/USD has proven very sensitive to political news, and traders ought to keep track of political events in both the UK and US, so as to take advantage of potential triggers to volatility. The GBP/USD is also positively correlated with the EUR-USD, but negatively correlated with the USDCHF.
GBP/USD Trading Main FAQs
Why is the GBP/USD so popular?
The GBP/USD forex pairing, also called the cable, is one of the oldest and most traded currency pairing. The term “cable” refers to the practice of transferring price quotes for the Pound in the 19th century via the undersea cable that crossed the Atlantic. Because the U.K. and the U.S. maintain close ties and large trade agreements there is always a huge need for businesses on both sides of the Atlantic to exchange Pounds for dollars or vice-versa. This liquidity has also made the pair popular with retail traders.
Why should I trade the GBP/USD?
As one of the most liquid currency pairs traders enjoy tight spreads, great liquidity and fills, and enough volatility to make trading the GBP/USD both interesting and profitable. When it comes to volatility, the pair often trades in a wider range on a daily basis when compared with other pairs. This obviously increases the potential to profit when trading the pair, although it also increases risk. As one of the most traded currency pairs traders will find a wealth of information about the GBP/USD, as well as a number of different ways to trade the pair, ranging from futures to CFDs.
What is the best strategy for trading the GBP/USD?
There are a number of successful strategies that can be used to trade GBP/USD. Which one is best is going to depend on current market action (trending vs range-bound) as well as the traders own risk appetite and trading psychology. One useful strategy is to trade breakouts in the pair. This strategy works well for GBP/USD because the pair has the tendency to move very strongly following a breakout. Other traders prefer to focus on news reports and trade the volatility that often follows important announcements from the U.S. and U.K.