Trading the GBP/USD Currency Pair
Despite the relative small size of the United Kingdom, its currency plays a large part on the world’s trading stage. Just as in world politics and economics, but sadly not football, the UK punches significantly above its weight in the financial world, meaning its currency is a significant component on international markets.
One of the most liquid trading pairs across the whole spectrum is ‘cable’ – GBP/USD – closely followed by GBP/EUR. These are the basic pairs for UK-based traders who are automatically hedged to their home currency. However, investors should tread carefully as such deep liquidity doesn’t mean there is no danger trading these pairs and there is no easy way to make a mint at home. Less liquid pairings may look to provide sharper changes of fortune, but remember these can also work both ways.
After the euro, this is the most popular currency pair to trade. It’s volatile intraday and long term. This pair is not as liquid as the EUR/USD and USD/JPY; thus, it usually has a higher spread than EUR/USD or USD/JPY. The London session is best for trading GBP/USD. During Asian hours, GBP/USD is hard to trade in large size because liquidity is lower and spreads become inconsistent. GBP/USD is the most common pair for beginners to lose money in. Range trading strategies are not recommended, nor is scalping. GBP/USD, just like GBP/JPY, is a great breakout and momentum currency. Dealing desks usually do a good job in GBP/USD during the Asia session as they understand that GBP/USD trading is where many people lose money, so dealers are willing to offer fixed spreads or tighter spreads during this time. However, when this currency pair does move, usually during London session, orders in GBP/USD are heavily re-quoted by dealing desks, thus offsetting the initial advantage of fixed or tight spreads during the Asia session.
Forex spread betting permits traders to take trades on the prospects of say, sterling versus other major currencies, as well as how those currencies might swing against each other. It also offers a way to trade on less familiar currency pairs, with the potential to deal in more than 80 currency markets worldwide.
Mainstream currencies are pushed and pulled by the financial health of their home nation. To try and predict which way to take aim, it is essential to take an economy’s pulse.
While far from being the sick man of Europe, poor GDP data and the government’s austerity plan has been biting over the last few years and growth is still somewhat sluggish. But, as currency traders know, everything is relative. Compared to the eurozone the UK is a happy place and (for the moment at least) it does not have presidential elections that could dramatically impact the economy.
‘GBP has done well against EUR as it is seen as a ‘slight’ safe haven in comparison. Despite the UK economy being in the doldrums, some think it might be a better [bet] given the problems afflicting the eurozone.’
Some news is easy to stay on top of, whereas other information – movements in the Consumer Price Index, for example – is harder to predict. In this regard, retail investors should always be aware that there will usually be someone more informed than them too – investment banks have armies of analysts and economists trying to figure out how these all-important figures are going to move. Trading a deeply liquid currency should stop smaller investors being swept away by larger players, but brokers advise their retail clients to avoid trying to make a killing like some of the bulge bracket banks can on these trades.
‘The UK is relatively independent and isn’t strapped to PIIGS. Therefore long positions on GBP against EUR may prove to be profitable if you expect a fall in EUR/GBP due to persisting problems in the eurozone.’