Trading GBP/USD

The GBP/USD is among the most widely traded currency pairs in the world. Its popularity is partly due to market volatility and online accessibility, along with tight spreads. With trading volumes forecast to rise, find out how to start investing in the GBP/USD. We also run through forex trading tips, price breakdowns and explain how to leverage the pair’s exchange rate history to trade today.

The GBP/USD Explained

The GBP/USD is the oldest established currency pair. It is often referred to as ‘The Cable’ after the transatlantic cable laid beneath the Atlantic, which transmitted prices across the ocean floor.

Established trade existed between the UK and US for many years but it was not until the 1970s that the GPB/USD that we know today, came to fruition. The shift was marked by the adoption of floating exchange rates and the departure of tying the value of currencies to gold.

Throughout its history, there have been many events that have had an impact on the pair’s exchange rate. An understanding of which, will help you predict the effect of future events on the value of the GBPUSD. The 1980s, for example, saw a tumultuous period triggered by the end of miner strikes in the UK and the uncovering of a hole in the ozone.

Before that, the period following the outbreak of the Second World War was the most decisive in the pair’s history. It was decided that to ease Britain’s borrowing costs, the sterling would be fixed to the dollar at $4.03.

Influences On The GBP/USD

Several macroeconomic factors influence the GBP/USD exchange rate:

• Economic growth – Arguably the best variable to measure the strength of an economy. When the UK economy looks to be strengthening, the sterling will typically rise against the dollar. The reverse is also true, a weakened UK economy will see the sterling fall vs the dollar. Investment, low unemployment and favourable interest rates can all fuel economic growth.
• Labour market conditions – The strength of a labour market is a good indication of the strength of an economy. Low unemployment and benefits rates are a good sign of a prosperous economy that lends itself to investment. GBP/USD tends to rise when the UK unemployment rate is lower than that of the US.
• Political events and stability – Major political elections like Brexit can cause movement in GBP/USD graphs. Brexit has certainly made its mark on the pair’s exchange rate history but for today’s investors, it may not be all bad news. At the very least, trends offer opportunities to generate trading profits. Generally speaking, however, political turmoil is unattractive to foreign investors. Decreased foreign investment leads to a depreciation in the value of domestic currency.
• Balance of payments – If a country is in deficit it means that it’s spending more than it’s earning, often borrowing from other countries. The increased demand for foreign currency lowers the country’s exchange rate. When the UK increases borrowing, the dollar rises against the GBP.
• Inflation & interest rate differentials – Changing interest rates impact inflation and currency value. Higher interest rates attract foreign capital and domestic currency appreciates. However, inflation rates impact appreciation. Low inflation correlates with a rise in value.
• Speculation – Market sentiment can have a big impact on the GBP/USD exchange rate. If the value of a currency is expected to rise, investors demand more of that currency to make a profit. Increased demand typically results in a spike in the value of the currency.
• Currency correlations – Given that currencies are traded in pairs, no single forex pair operates independently of others. Fluctuations in one currency will have repercussions for another, even if they aren’t in the same pair. Take the GBP/EUR, which is a derivative of the GBP/USD. Movements in the dollar will have a knock-on effect on the Euro because both are linked by the GBP.

Some forex pairs will trend in line with one another, others will diversify. Understanding the relationship between today’s currency pairs can be used to your advantage.

Calculating Correlation

Correlation is a measure of the relationship between pairings. Assessments use historical data to predict impacts on real-time GBP/USD charts. The correlation range extends between -1 and +1. The closer you move to +1 the more aligned the movements between the currencies are, conversely, the further away you move from +1, the difference increases. A correlation of 0 means that the relationship is arbitrary.

Calculating the correlation between pairings is relatively simple. Open an Excel and use the function (=CORREL). Then follow these simple steps to set up the calculator:

1. Enter pricing data for the two currency pairs in separate columns
2. Fill the columns with the daily closing prices over a set period
3. At the bottom, in an empty cell, enter =CORREL
4. Highlight the data in the column
5. Insert a comma
6. Repeat steps 4 & 5 for the second currency
7. Close the formula

The final figure is the correlation between the two currencies.

Note, forex correlations are not fixed, meaning they may fluctuate in response to external factors.

Pros Of Trading GBP/USD

There are several reasons why investing in the GBP/USD currency pair is popular:

• Liquidity – The GBP/USD pair accounts for approximately 14% of the daily forex trading volume. High liquidity means that large sums of money can be moved in and out of currencies, often with narrow spreads. It also means there’s a range of investment vehicles available to UK investors and day traders.
• Volatility – GBP/USD typically boasts a wide price range compared to other major forex pairs. This is primarily due to market volatility. Significant volumes paired with high volatility can lead to large profits.
• Resources – There is a great deal of information about trading economics available online, including GBP vs USD historical data, live rates, plus weekly and long-term technical forecasts. As a result, conducting technical analysis has never been easier. Traders today can utilise a multitude of tools from market signals and community forums to real-time charts and graphs.
• Costs – With spot forex trading, the cost of trades are often incorporated into the spread. This is unlike other products and markets where additional commissions can eat into profits.

Cons Of Trading GBP/USD

There are also downsides to investing in GBP/USD:

• Volatility – While volatility can bring large profits, when the GBP USD pair breaks, serious spikes can lead to substantial downside. To curtail losses, investors should employ disciplined risk management strategies.
• Ambiguity – Rapid movement between the pair can often produce false signals. As a result, inexperienced traders may fall prey to misleading information.
• Influence – The Cable is greatly influenced by UK forex and economic news, particularly when there are discrepancies between monetary policy and exchange rate expectations.
• Competition – Today’s markets are increasingly dominated by advanced trading algorithms. Even with competitive 1 month and 1 year forward rates and excellent market signals, traders often need more than weekly pivots, 10-year or 50-year charts to turn a profit.
• Overexposure – Some currencies move in the same direction, such as the GBP/USD and EUR/USD. Given their positive correlation, investing in both can lead to a false sense of security. Rather than diversifying risk, traders may be amplifying losses if the US dollar moves against them.

GBP/USD Trading Strategy

A variety of strategies can be used on the GBP USD. Whether you rely on wave counts via Elliot Wave analysis, weekly pivots points, or 100-year forecast charts, there are several fundamentals:

Timing

The GBP/USD can be live traded 24/7. With that said, the best time to day trade the pair is when both the UK and US markets are open, between 08:00 – 10:00 GMT and 12:00 – 15:00 GMT. Spreads are often at their tightest as volume and profit potential increases.

Investors trading outside of these hours may need to post greater profits to compensate for wider spreads. Fortunately, there are still multiple forex index systems used to identify market opportunities and support and resistance levels.

News

For those that want to avoid using 1 minute, 15-minute, yearly or 10-year forecast charts, economic reports can be used instead. Daily forex news releases and index forecasts are a great source of information. Data regarding unemployment rates, public sentiment and economic growth can all inform trading decisions. Yahoo Finance, DailyFX and Google Finance are popular news outlets for GBP/USD updates.

Risk

Traders should aim for strong risk-reward ratios when trading GBP/USD. A ratio of 1:4, so risking 250 pips for a return of 1,000 pips, will help balance volatility with profits. Using the 1% rule is also good practice. The 1% rule dictates that investors don’t risk more than 1% of their total portfolio on a single trade. This will help control losses and facilitates longer-term investing success.

GBP Vs USD Forecasts 2025

Many brokers and traders use long-term forecasts and outlook predictions to inform investment decisions. Staying up to date with today’s political and economic events is a good place to start. Whether you go on to shape your breakout strategy using live rates or technical analysis on 5, 20 or even 100-year charts, it’s important to keep up with the basics.

Final Word On GBP/USD

Investing in the GBP/USD currency pair continues to be popular among UK traders. High volume and volatility, along with tight spreads, make it a go-to FX major. There are also multiple investment vehicles available, from futures and options to day trading instruments. Of course, as with all online trading, a careful approach to risk management must be incorporated into strategies.

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