GBP/USD - A Report Brought to You by Q8 Trade
The GBP/USD is in the throes of liquidity in the market. The pair refers to the number of US dollars (the quoted currency) required to buy the pound sterling (the base currency).
The GBP/USD represents about 14% of the total market traded. It is characterized by high volatility rates in addition to the instability of prices.
This pair refers to the circulation of the British pound (the currency of the United Kingdom) with the US dollar (the currency of the United States) so it is among the major Forex pairs.
A historical perspective
Trade relations between the two currencies have existed for a long time. The concept of the pound sterling against the US dollar was not the same concept we now know existed until the early 1970s. A change from floating to floating exchange rates was made by both the UK and USA.
Before the early 1970s, exchange rates were pegged to the value of gold. This was the result of the Bretton Woods Agreement of 1944. This has affected the sterling’s performance for more than three decades.
After the agreement was concluded, the relationship between the two currencies began to take a more dynamic course. The 1980s saw great price movements because of the boom and events in the UK including the discovery of a hole in the ozone layer, the termination of miners for their strikes, the country’s first mobile phone call and the technological revolution.
At this time, the United States was in a very different situation where there was a state of instability especially high unemployment in the wake of the Vietnam War, and the failure of the Federal Reserve to take measures that would reduce the high inflation situation.
The impact of success in Britain and the shortcomings of the United States was felt in exchange rates which led to the support of the pound sterling against the US dollar.
But then, the US took major changes such as raising interest rates to fight inflation making tax cuts, increasing military investment and the US economy booming again.
All this affected the GBP and made it drop from $ 2.44 to $ 1.05, the lowest recorded historical exchange rate for this pair.
The GBP/USD saw a 25% drop in one day in the early 1990s where the Bank of England created one of the most important moves in the history of this pair.
The Bank of England supported the value of sterling in an attempt to preserve the value of the pound against the German-German mark as part of the exchange rate mechanism. The problem was that the UK was in recession and high-interest rates were not enough monetary measures. On September 16, 1992, Britain left the exchange rate mechanism intact and abandoned the pound’s support, and the pound retreated all of that in a single day.
In 2007, the Sterling regained its strength again, rising above $2. The mortgage crisis took place, leading to major problems for a number of major financial institutions which led to the volatility of the US economy.
In 2016, the most important event of the decade was Britain’s desire to leave the EU which led to strong volatility in the pound losing more than 16% of its value in two years.
How is the value of the GBP/USD pair determined?
The value is determined by the value of the sterling. If the sterling is worth $1.3, you need $1.3 to buy £1. Of course, this value changes almost instantaneously over the five trading days.
What makes the GBP/USD interesting to trade?
As explained above, the British pound is experiencing near-constant price movements which leads to fluctuations in the price of the pair’s trading and to attracting traders as a result of fluctuations.
Is the GBP/USD trading profitable?
The GBP/USD comes in third place in terms of volume of liquidity and trading in the pair so it is among the most traded for several reasons including:
- Price volatility: The price of sterling against the dollar varies widely against other major currency pairs. This is due to the inability of traders to predict the movement of the next price and therefore, the volatility of the price results in large profits.
- Liquidity: Liquidity offers great opportunities for traders. This is the third most traded currency pair in the Forex market accounting for 14% of the daily trading volume.
- The relationship between volume and volatility: 35% of the volume of trading passes through Britain, and it is characterized by large fluctuations, which are used in the process of making profits.
- Availability of information: This pair is characterized by the availability of a lot of information and live price data which makes it easier to find this data more than trading. For example, at Q8 Trade you will find technical analysis for the GBPUSD pair, live charts, real-time prices, recommendations and all the news that affect the pair’s performance.
However, before deciding which currency pair you would like to trade, we highly encourage you to learn more about what would you get from the platform that you choose to trade with and what are the advantages you will be getting from choosing a certain platform over another.
What factors affect the performance of this currency pair?
- Economic growth: As the British economy looks stronger than the US economy, the sterling is rising against the dollar. Similarly, when the US economy outperforms its British counterpart, the sterling weakens against the dollar.
- Interest rates: Interest rates are known to support the currency. If the Federal Reserve raises interest rates, this will have a positive effect on the dollar so it will rise against the British pound and vice versa if the Bank of England makes decisions that will affect the pound.
- Reports on labor productivity and investment increase: These reports support economic growth in case numbers are rising which directly affects the performance of the GBP and USD.
- Political Events: Political events can lead to strong fluctuations in currency performance. A good example of this is the impact of the trade war on the performance of the US dollar and the GBP on the GBP.
- Links with other couples: No one pair is completely independent of other couples. Each pair is made up of two currencies and each currency always shares in other pairs which make the effect here indirect.
How can you trade GBP/USD through CFDs?
Many traders prefer to trade the GBP/USD pair through CFDs as it increases their ability to speculate on the movement of this pair without actually owning the currency.
Given the size and liquidity of the pair, which is the third most traded currency pair after the euro against the dollar and the dollar against the yen, it is a common choice for many when they think of trading against differences in the forex market.
For example, if you decide to trade sterling against the US dollar, you will certainly have two expectations, either rising or falling. If you think the pair will rise, you are buying, and if you think the GBP will fall against the USD, you will sell. If your expectations are correct, you get profits by the price difference.
Let’s make a numerical example:
If the Sterling is trading at 1.2520 / 1.2530, and you have expectations that the Sterling will rise against the Dollar, you bought 100 key contracts from this pair through CFDs at 1.2530.
After a while, the pair rose by 30 pips, and the new price is 1.2550 / 1.2560. You decided to close your deal by selling the 100 key CFDs at 1.2560.
You bought with 1.2530 and sold at 1.2560. The difference here is 30 points. Because you bought 100 CFDs in this pair, your profit is 30 x 100 = $3000.
The base contract value here is £10,000 and the point is $1.
The advantages of GBP/USD trading through CFDs
- Make profits anyway: CFD enables you to make a profit in the event of high or even falling prices where you can select your position either by buying or selling and getting the price difference as a profit.
Example: If the GBP/USD price is 1.2650 and you expect it to fall back to 1.2640, you can set a short position and you will get the price difference in the event that your expectations are correct, without actually buying the pair.
- Leverage: This provides you with trading in small amount but with great value. You can deposit a non-large amount into your account, which will be multiplied by percentages depending on the leverage you choose. Then you can trade all that amount and calculate your profits by the full value of the amount, not just the depositor. This can greatly increase your profits but it can also work in the opposite direction.
Example: You can only deposit $100 for a trade of $3,000 by way of a 1:30 leverage.
- Protecting Your Money: Forex trading through CFDs can keep your portfolio safe from risk and carry out hedging actions, protecting you against negative price fluctuations that could lead to your loss.
Example: When you trade the pound against the US dollar, you already bought some pairs when the price was high, and with strong US data, the dollar rose, you now think you lost. Conversely, the most important advantage of CFD trading is that you can make profits even when prices fall.
How to trade the GBP/USD with Q8 Trade?
- Select the financial instrument:
First, choose the GBP/USD trade. Q8 Trade has more than 300 international and local financial instruments. CFDs can be traded through a wide range of options that include Forex, Commodities, Stocks and Indices.
- Enter the volume:
Enter the number of units you want to trade from sterling to dollar. You should know the standard trading volume in this type of Forex pairs.
- Select the transaction type:
Think first about the type of deal (buy/sell). If you think that the GBP will rise against the Dollar, select Buy. If you think that the GBP will fall against the USD, select the Sell.
- Manage the risks:
You can take advantage of a wide range of security tools offered by Q8 Trade including Stop Loss and Take Profit orders. This will ensure you close your position at the price you set regardless of what is happening in the market.
- Watch your deal:
Keep track of your transaction permanently to track real-time profits or losses. To be aware of what’s happening in your deal, you may take action in the middle to protect it.
- Close your deal:
If your transaction is not automatically closed by stop or loss orders, you must close it in time.
Why should you trade the GBP/USD with Q8 Trade?
- Q8 Trade has leverage that allows you to increase the amount of money that you will trade which ensures that you can enter deals more and then your profits will be higher.
- Q8 Trade has historical charts for GBP/USD prices which you can see at any time to study the past to predict future movements.
- Q8 Trade covers all the news that may affect the GBPUSD trading which makes you predict and anticipate the following price movements.
- Prices and data on the website are in real time which helps you a lot when opening your positions.
- The brand does not take any exchange fees. Additionally, you do not have to own the actual asset. This is the advantage of CFDs.
- You can open short positions on the GBP/USD pair without buying it!