GBPUSD

The British pound to United States dollar (GBPUSD) is a major currency pair that enjoys the benefits of being one of the oldest and most popular trading pairs. The GBPUSD pair is often called “trading the cable.” This refers to the mid-19 th century use of transatlantic cables to communicate Forex market data between New York and London.

Novice and established traders alike are attracted to the liquid market of a cable trade. Based on two of the world’s dominant economies, the pair is the third most widely traded currency pair in the world. Along with good trading volume and liquidity, the pair also generally enjoys tight spreads. This keeps the cost of trading low. Lastly, GBPUSD offers traders plenty of volatility opportunities to make quick profits from price fluctuations.

GBPUSD Live chart: Current exchange rate

One-year chart GBPUSD

This Forex chart shows the price and volume data for the British pound/ U.S. dollar (GBPUSD) currency pair over a one-year period (September 2021 to September 2022).

Screenshot courtesy of TradingView!

How to trade GBPUSD

Speculative day trading is one common way to trade the British pound/ U.S. dollar (GBPUSD) currency pair. Day trading the Forex market focuses on buying and selling a currency pair on the same day. Traders will attempt to profit from quick intraday price fluctuations.

A drawback to day trading is that it requires constant attention from the trader to take advantage of rapid price movements. There can be a high failure rate, especially for beginners. Additionally, the day trading lifestyle can be all-consuming. This is something that is not practical for traders who do not have the time available to watch live charts.

Alternatively, some traders prefer to trade GBPUSD using a swing trading strategy. With a swing trade, the trader hopes to capture a price movement that is larger than what a day trader can achieve in a day. Swing trades last from a few days to a few weeks, although they can last longer.

If you have very limited time and would like a balance between trading and life, then Lazy Trading might be a better way for you to trade the GBPUSD. Lazy Trading is a longer-term strategy that focuses on identifying a few simple, repeatable patterns.

Why trade  GBPUSD

When it comes to Forex trading, the GBPUSD trade is one of the most popular pairings among traders. The GBPUSD pair represents approximately 11 percent of all Forex trades. It is the third most widely traded pair in the world.

The sheer volume of trades makes GBPUSD attractive to traders who want quick order execution. The liquid market generally means narrow bid-ask spreads and lower transaction costs. Additionally, there is enough volatility in the pair for traders to turn a profit from quick price fluctuations.

Compared to other trades (such as exotic Forex trades), the GBPUSD is relatively safe. The two nations comprising the trade are modern economies. For many investors, the United States is a safe-haven investment choice, with an economy that weathers global recessions better than most.

Lastly, there is a large amount of historical data on the trade to provide technical analysts with valuable trading insights. Online Forex tools and platforms give traders access to historical price and volume data, along with an array of customisable graphs and charts. Using past performance data, traders will attempt to predict future trade behavior.

This transparency of trade information also helps traders who rely on fundamental analysis. These traders will review government economic indicators on inflation, interest rates, employment, trade balances, and retail sales to determine good entry and exit points for their trades.

A GBPUSD trading strategy

One GBPUSD trading strategy focuses on anticipating monetary policy changes implemented by either the U.S. Federal Reserve or the Bank of England. For this example, let’s consider how the Fed’s actions on U.S. interest rates typically affect GBPUSD.

First, let’s review a chart showing the GBPUSD trade in the two years prior to the rate hikes of 2022.

You can see the trade plummets in March 2020 as global markets react to pandemic shutdowns. However, it quickly picks up steam in May 2020 after the Fed affirms its intention of keeping interest rates at historic lows (near zero) in response to the economic crisis.

Low interest rates depresses demand

In general, a loosening of monetary policy by lowering interest rates will weaken the demand for a currency. Investors will flock to assets with a higher potential return, such as stocks. In the case of the low U.S. interest rates of 2020 and 2021, demand fell for the U.S. dollar, thus pumping up the GBPUSD trade.

The trade maintained its upward momentum until about mid-2021. At this time, growing inflation became a concern in the U.S. and the Fed signaled it might soon increase interest rates.

The effect of interest rate rises

Below is a year-to-date chart (January to September 2022) that shows the trade as the Fed implemented rate hikes to cool down the U.S. economy and reduce inflation:

The higher interest rates in 2022 strengthened the demand for the U.S. dollar compared to the British pound. This caused the GBPUSD trade to fall dramatically. While there are certainly other factors that impacted the GBPUSD trade from 2020 to 2022, it’s clear that changes in U.S. interest rates influenced price movement.

For example, in September 2022, the GBPUSD touched an all-time low of 1.03. This was after the UK government announced its plans to cut taxes and increase spending, which spurred fears of even greater inflation to come.

Here are some things to keep in mind when initiating a GBPUSD trade based on interest rate changes:

Timing

When trading GBPUSD, look for times when there is sufficient volume and volatility for the trade to hit your profit projections. Busy times are best for narrow spreads. Ideally, this means trading when both the U.S. and UK markets are open.

News

To successfully trade GBPUSD based on an interest rate strategy, follow the news from the Federal Reserve and Bank of England regarding monetary policy changes. This trade can also react to other economic indicators. This includes reports on inflation, unemployment, retail sales, and gross domestic product.

Trade selection

Before entering any Forex trade, calculate the trade’s risk reward ratio. As a trader, it’s up to you to determine what is an acceptable risk reward ratio for you. Risk reward ratios often vary depending on a trader’s experience level and how risk averse they are.

Trade management

Be sure you have a plan for managing your trade. You will want to know your entry and exit points. Decide in advance when you should take your profits. Should the trade go against you, you’ll want an exit strategy that includes a stop-loss order.

History of GBPUSD

History of GBPUSD

Over the decades, the GBPUSD trade has experienced its share of turmoil and extreme volatility. We discuss four of these events below.

Inflation, Margaret Thatcher, and Ronald Reagan (1984-85)

In the early 1980s, both UK Prime Minister Margaret Thatcher and U.S. President Ronald Reagan were struggling to tame high inflation in their respective countries. By 1984, Reagan’s tax cuts began to have the desired effect of stimulating the American economy. This was followed by the Federal Reserve’s decision to increase interest rates. This move boosted investor demand for USD.

The combination of these two economic policies sent the value of the dollar soaring against other currencies, including the British pound. Starting in mid-1984, the GBPUSD was in a freefall that didn’t bottom out until March 1985, as shown in the following chart.

Great Recession (2008-2009)

The financial crisis of 2008 sent markets crashing around the world. Investors frantically pulled their money from many asset classes. A good portion of these investors sought out the U.S. dollar, which they believed to be a safe-haven currency during market volatility. The demand for USD soared, causing the GBPUSD to lose about a third of its value between 2007 and 2008.

Brexit (2016)

It’s not just a financial crisis that can cause volatility in the GBPUSD trade. Political upheavals can be just as volatile. The June 2016 Brexit vote stoked fears among critics who believed leaving the EU would harm the British economy. This uncertainty caused many investors to sell their UK investments. We can see the impact the Brexit vote and the subsequent political upheaval had on the GBPUSD in the following chart.

British pound collapsed to record low (September 2022)

The 2022 fall of the British pound came as the U.S. dollar surged against most other currencies. Overall, the U.S. economy was seen to be in a stronger position to weather what some experts believed would be a 2023 worldwide recession. The Fed’s program to increase interest rates also boosted demand for USD.

In late September, the British pound experienced a brutal selloff in response to the government’s announced mini-budget. The budget included massive spending increases to stimulate the economy. The news sent the pound plunging to historic lows and caused turmoil in the UK debt market.

The controversial proposal also gave big tax cuts to top earners. Opponents criticized this as a “giveaway to the rich.” While the government decided to scrap this part of the plan, concerns remained regarding the large amount of government borrowing required by the new budget.

Future predictions for GBPUSD

Medium-term predictions

As of October 1, 2022, the medium-term prediction for the British pound/ U.S. dollar is bearish. According to Daily FX, the weekly change in GBPUSD shorts increased by 152 percent, while longs were -32 percent.

The Q4 2022 technical forecast remains bullish on the U.S. dollar. The currency is predicted to maintain its global safe-haven status. The greenback also benefits from an interest rate advantage as the Fed continues to lead among global central banks in its monetary tightening strategy.

Conversely, the Q4 2022 fundamental forecast shows a likely weaker British pound. This is due primarily from the uncertainty surrounding UK Chancellor Kwasi Kwarteng’s new tax cuts and increased spending plans. Experts estimate this will add GBP105 billion to the UK balance sheet.

Long-term predictions

Long-term predictions going into 2023 and beyond are more difficult to make given the many variables that could impact the GBPUSD trade. However, in general, as of October 2022, it appears the pound-to-dollar forecasts among experts are trending more bearish than bullish.

One of the biggest wildcard factors impacting the trade is how effective the UK government’s new economic policies will be at spurring economic growth while simultaneously keeping inflation in check.

Any number of other factors could swing the trade one way or the other. These include soaring energy prices, the war in Ukraine, and the Fed’s continued hawkish stance on interest rates. Going forward, GBPUSD traders should prepare themselves for higher volatility as these factors play out.

The difference between trading and investing in GBPUSD

Trading GBPUSD

In most circumstances, the GBPUSD trader is looking for a short-term trade. These trades could last hours, days, weeks, or perhaps a few months. The goal is to pinpoint and take advantage of shifts in the Forex market to achieve quick profits.

Investing in GBP and/or USD

Investing in individual currencies—such as the British pound or the U.S. dollar—requires different strategies than GBPUSD trading. Many currency investors have a longer-term perspective and will hold onto their investments for at least a few months, if not significantly longer.

A common goal for currency investors is portfolio diversification. Currency investors have a variety of investment vehicles beyond the Forex market. For example, they might use currency exchange traded funds (ETFs), exchange traded notes (ETNs), or mutual funds.

5 Tips for Successful use of GBPUSD

1. Understand what causes volatility in GBPUSD

There are many factors that lead to GBPUSD volatility. All of these can move the price, and for that reason you should understand these factors. Examples of volatility factors that can drive the price of GBPUSD include:

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    • Growing international demand for either currency.
    • Central bank policy to increase, decrease, or maintain interest rates.
    • Political events that lead to large currency movements (e.g., the British pound collapse after the Brexit vote).
    • Economic news—especially surprising data that catches traders off guard. This includes unemployment figures, inflation rates, or gross domestic product numbers.

2. Develop a trading plan

Create a trading plan that fits your lifestyle, trading objectives, and risk appetite. Write down your strategy in advance of placing your first GBPUSD trade. Having your plan in front of you as you trade serves as a roadmap to guide you.

A good trading plan can also help take the emotion out of trading. It provides you with a set of rules outlining how to respond to various market conditions.

3. Practice makes perfect

Now that you have a written plan, put it into practice through paper trading. Do this for a while before you place your first real trade. By using a demo account or virtual trading, you will improve your ability to make quick decisions. You will also “battle test” your trading plan, giving yourself the chance to fine tune it before live trading.

4. Employ risk management techniques

The use of some simple but effective risk management techniques can turn a trader with mediocre results into one who enjoys consistent profits. Not risking more than you can afford to lose, using stop losses, and taking your profits are easy ways to amplify your success.

While risk management is not a foolproof system for preventing all losses, it can limit them and set you up for bigger gains on your winning trades.

5. Track your wins and losses

Successful traders know the importance of keeping meticulous records. You can learn from both the big winners and the disappointing losses. You can use a simple Excel spreadsheet to record trade details. Record your entry, exit, stop-loss, target, profit, and loss. By reviewing your trade results, you can spot trends and see where your trading plan needs adjusting.

What are the risks with GBPUSD?

The GBPUSD currency pair has specific risks traders should be aware of when placing a trade. Here are a few of the more prominent risks:

Interest rate risk

The monetary policies of the Bank of England and the U.S. Federal Reserve can directly affect the trade. That’s because central banks will often increase or decrease interest rates to influence the economy. This interest rate change impacts a currency’s exchange rate.

For example, if a central bank lowers interest rates, the nation’s currency will weaken because investors will seek higher returns in other investments. Conversely, if a central bank raises interest rates, the nation’s currency will strengthen. Investors will be drawn to a currency with higher returns.

Thus, even a small change in interest rates in the UK or U.S. can cause a dramatic price change in the GBPUSD trade.

Government policies

The announcement of new government economic policies can impact the trade. This is particularly true if investors are skeptical about the potential effectiveness of the government’s plans.

An example of this is when the British government announced in September 2022 that it would implement sweeping tax cuts to spur economic growth. This news caused the GBP to fall to a record low against the dollar. Investors worried the tax cuts would only worsen inflation. In turn, this could cause the Bank of England to sharply raise interest rates.

Economic news

A wide variety of economic reports can impact the GBPUSD trade, especially if the news is unexpected. The market can react swiftly, causing rapid price swings. For this reason, Forex traders are known to keep a close eye on inflation reports, consumer confidence reports, and gross domestic product reports, among others.

Quick price movements

Like other trading pairs, GBPUSD can experience rapid price movements. This can be a boon for traders who utilize risk management strategies to take advantage of price swings. However, traders who are unprepared for rapid price fluctuations risk losing money quickly.

Leverage risk

Traders who opt to use a margin strategy in their Forex trades face leverage risk. Margin trading is a risky strategy that enables the trader to use a small amount of their own money to make a trade, borrowing the balance from their broker.

The use of this type of leverage is a double-edged sword. On one hand, the trader can quickly reap huge rewards should the trade go in their favor. A small price fluctuation in the wrong direction, however, can expose the trader to outsized losses much greater than the initial investment.

The trader may even face a margin call, which will force them to immediately add cash to their account or sell existing assets. In some notable cases, margin calls have wiped out entire trading accounts.

GBPUSD: General terminology

Currency pair - Within the foreign exchange market, a currency pair is a price quotation between two different currencies. This quotation represents the value of one currency against another.

Base currency - In a currency pair, the first currency listed is the base currency. For example, in the GBPUSD pair, GBP (British pound) is the base currency.

Quote currency - The second listed currency in a currency pair is the quote currency. For example, in the GBPUSD pair, USD (United State dollar) is the quote currency.

Spread - The bid/ask spread is the difference between the buy and sell prices. The bid is the price a broker is willing to pay, the ask is the price a broker will sell the currency.

Major pair - Currency pairs are categorized based on the volume of their trades. A major pair is a currency trading pair with high volume that trades against the U.S. dollar.

Minor pair - Minor pairs are currency trading pairs that do not include the U.S. dollar. The volume for these pairs is not as high as major pairs.

Exotic pair - An exotic currency pair combines the currency from an emerging market with a major currency, such as the USD. Exotic pairs are often volatile and can experience low trading volume.

Cable - Forex traders use the word “cable” to describe the British pound (GBP) and the exchange rate between the GBP and the U.S. dollar. During the early days telegraph cables conveyed trading quotes between New York and London.

Parity - When referring to prices in the Forex market, parity is when two currencies have an exact one-to-one exchange rate relationship.

Reserve currency - Reserve currencies are large amounts of foreign currencies central banks and other financial institutions hold in reserve for use in international transactions. The world’s dominant reserve currency is the U.S. dollar.

Conclusion

Whether you are a GBPUSD trader or not, the currency pair is an interesting one to study for several reasons. You could consider it a real-world representation of what is going on in the UK and U.S. Whether it is political change, prosperity, growth, or economic struggles—it is all reflected in the strength or weakness of a nation’s currency.

When we try to predict the medium and long-term trend of GBPUSD, what we are really trying to forecast is the future economic health of two countries that play pivotal roles in the global financial system. Obviously, the trade does not offer us a definitive crystal ball into upcoming events. It will not tell us if there is another Great Recession, Brexit, global pandemic, or inflationary period in our future.

Nonetheless, many traders have successfully used it defensively to hedge against the ups and downs of an uncertain world. For that reason alone, understanding the basic trading strategies behind GBPUSD can give any investor key insights that may lead to more secure and profitable investing.

Frequently Asked Questions (FAQs)

Is GBPUSD volatile?

In general, the GBPUSD currency pair is less volatile than other Forex pairs. GBPUSD is a popular currency trade and one of the most liquid Forex trades in the world. There are many buyers and sellers, making it easy to execute a trade. That being said, the trade can experience high volatility during times of economic stress and political upheaval.

What is the nickname for GBPUSD?

The nickname for GBPUSD is “cable.” The currency pair achieved this unusual name during the mid-1800s. It is a reference to the deep-sea cables that transmitted trade details back and forth from London and New York City. At the time, the ability to transmit messages across the ocean floor was a revolutionary technology.

Why is Pound Sterling called ‘GBP’?

GBP is an abbreviation for the British pound sterling. The “GB” part of the abbreviation is the International Organization for Standardization (ISO) code for the United Kingdom. The “P” part of the abbreviation stands for “pound.”

How much is traded in GBPUSD a day?

From January 1, 2022, to September 30, 2022, the average daily volume traded year-to-date for GBPUSD was 274,747 contracts.

Is Pound Sterling a safe currency?

The pound sterling is generally not considered a safe-haven currency. A safe-haven currency is one that investors anticipate will hold its value (or increase in value) during times of economic instability.

Over the past century, the pound sterling has shown significant vulnerability during periods of widespread stress. For example, the pound sterling declined significantly during the Great Recession. It also declined during Brexit and during the inflationary period following the global pandemic.

Is Pound Sterling correlated with gold?

Compared to other currencies, there is not a significant positive or negative correlation between the pound sterling and gold. The strongest currency correlation with gold tends to be in those countries that are top gold producers, such as Australia and South Africa.

Does GBPUSD have a big spread when trading?

The GBPUSD does not typically have a big trading spread. During normal market conditions, Forex traders will find GBPUSD to have a narrow bid-ask spread. However, it’s important to note that the GBPUSD spread can fluctuate quickly during times of market stress.

Which is that safer currency, GBP or USD?

Based on several factors, USD is a safer currency than GBP. The USD has a bigger trading volume in the Forex markets and is a reserve currency for worldwide trade. Compared to the UK, the U.S. economy is larger and stronger. The USD is a safe-haven currency. This means investors will often convert their assets into dollars during economic downturns.

Should I invest in GBP or USD?

You should base your decision to invest in GBP or USD on several factors. To profitably invest in either currency, you will need to educate yourself on how the currency markets work. You’ll want to understand the factors impacting the value of one currency over the other. We suggest a good starting point is to read our article on what is Forex and how it works.

Should I trade GBPUSD?

For the active Forex trader, there are many benefits to trading GBPUSD. The pair offers traders good volume, volatility, and liquidity—all of which are needed to turn a profit. There is also extensive historical data available on the trade. This abundance of data makes technical analysis easier.

These benefits to GBPUSD might lead you to decide that a trade is right for you. However, like all Forex trades, there are significant risks involved.