GBP/USD trading - How to trade the Pound

Interestingly, it was only after 1970 that the modern concept of the GBP/USD exchange rate came to fore. Prior to this, both currencies were tied to the value of gold. The gold standard presided over the forex rate of the pound sterling as well as a range of other currencies of Ally countries. With the adoption of floating exchange rates, the relationship of the GBP/USD currency pair became far more varied. 

In the 1980s, the GBP/USD exchange rate reached historical levels of volatility. This can be attributed to separate events that affected the exchange rates of each country’s currency to a large degree. Over the following 30 years, there have been a number of events that have played a big role in the GBP/USD rate. Understanding the factors that affect the currencies of both countries as well as getting to know how to trade GBP/USD is the next step in our latest guide.

If you are familiar with forex pairs and changes in exchange rates, you’ll know that there are a number of different factors that affect the price of a currency. Understanding and staying abreast of current developments will allow you to better predict in which direction said currency might move. When you wish to trade GBP/USD, it’s paramount that you stay informed with internal issues and changes to various economic policies. Below, we’re going to quickly run through several major determinants that you should always consider before speculating on the price movement of the GBP/USD forex pair. 

Interest rates 

Current economic theory will tell you that there is a high correlation between interest rates and exchange rates. Why? Well, think about it this way. If the interest rates of a country increase, lenders will receive a higher return relative to a country that’s interest rates are lower. If the UK raises interest rates relative to the US, there will be a higher demand for the British pound. This means the British pound will appreciate relative to the US dollar. If interest rates are lowered, less foreign capital will be attracted – meaning the pound will depreciate relative to the US dollar. 

Political changes 

Political instability in a country will have a major effect on investor confidence. For the most part, instability within the political landscape of a country will lead to a more subdued investor outlook. A less optimistic outlook means investors are less likely to invest capital. This leads to a depreciation of the local currency. If renewed political stability arises, investor sentiment will improve and this may well lead to an appreciation of the currency in question. 

Sustained economic growth 

GDP is a major indicator of economic health within a country. As such, many traders keep an eye out for data reports on the latest GDP numbers. This will play a big role during trading sessions and certainly change the price of a currency. Strong and sustained economic growth will mean that a country will attract a larger percentage of investors. This leads to a higher demand of the local currency and a subsequent appreciation of the price there-of. It’s important to understand the currency economic situation of a country so as to judge what might happen to the price of the currency. 

Low inflation 

There is an inverse relationship between inflation and exchange rates. Countries that have lower inflation will see their currency appreciate while countries with higher inflation rates will find that the purchasing power of their currency diminishes (leading to a weaker currency relative to countries with low inflation). Thus, it’s a good idea to track inflation rates from the UK and the US to assess which countries’ currency will appreciate relative to the other.

When it comes to finding out how to trade GBP/USD, it’s important to establish a few points first. You’ll find that you can trade forex contracts or contracts for difference (CFD) for a particular currency pair. For the purposes of our guide and services on offer on our platform, we’re going to focus on the latter – forex CFDS. More specifically, CFDs for GBP/USD. This means that you won’t buy or sell the underlying asset. As an online trader trading forex CFDs, you’ll be speculating on the price movements of the currency. In this instance, one party agrees to pay the other the difference in the price between the start of the contract and the end of the contract. Therefore, you’ll be focusing on whether the price of the British pound appreciates or depreciates. 

You will either be taking a long position or a short position. If you feel that the British pound will appreciate relative to the US dollar, it’s vital to take a long position by buying the CFD. If you feel that the British pound will depreciate relative to the US dollar, then you’ll take out a short position by selling the relevant CFD. 

Below, we’ve outlined a number of tips that will help you when you trade GBP/USD. There are always dozens of different pointers that can be taken under consideration. However, we recommend that you focus on a few at a time. This will give you better insight into how to trade GBP/USD and enable you to start from a point of confidence. 

Timing is important 

When you trade GBP/USD, you must keep track of the trading hours. You don’t want to end up in a session, such as the Asian session, which is predominantly a quiet trading session. The best time to trade is when the volume of trades are high – or at an optimal level. There are two different times when trading of GBP/USD is at an optimal level. The first being between 3am – 4am Eastern Daylight Time. The second is at the intersection of the US and European markets. At these two times, you’ll find that there are a massive amount of trades taking place. It gives you the best chance to capitalise on a fast-moving market with low spreads.

Use technical analysis 

It’s important to apply a type of analysis when you trade. When it comes to trading GBP/USD, you’ll find that technical analysis is a favourite amongst traders. This pair responds really well to key indicators used in technical analysis. As such, you’ll also need to understand what technical analysis entails. In short, you will need to apply different indicators which will give you an idea of current trends. Once you are able to identify these underlying trends, you’ll find it a lot easier to pinpoint your entry and exit points. It’s pertinent that you identify the exact point where you should enter a trade and when it’s best to exit one. This will give you the best possible chance of knowing precisely when to buy or sell and apply stop-loss orders. Ultimately, giving you the power to take a profit at its peak.

You now have a much better idea of how to trade GBP/USD. It is important to remember that trading forex online with us will require you to speculate in the price movements of the underlying asset – in this case the British pound relative to the US dollar. You must take into account all of the possible factors that play a role in changing the price of the currencies in question. Remember to track the latest economic data coming out of the UK and US while also keeping tabs on any political headwinds or external determinants such as natural disasters. There are a fair share of particulars to account for. Once you are able to assess these, you can move on to trading CFDs focused on the GBP/USD forex pair. Make sure that you apply a strong strategy and use all the technical indicators at your disposal. 

Use our latest guide to trade USD/JPY or head on over to our trading platform and sign up. You’ll be able to access a wide range of instruments and this will enable you to make the most of your trading experience!