Reading time: 8 minutes
Forex trading, or foreign exchange trading, is the process of trading one currency against another. Along with the euro (EUR) and the Japanese yen (JPY), the British pound sterling (GBP) and the US dollar (USD) are two of the most liquid traded currencies on the financial markets, meaning that the two currencies can be easily bought and sold given the high number of willing buyers and sellers.
According to the data collected by the Bank for International Settlements (BIS) in its latest Triennial Central Bank Survey, the GBP/USD, also referred to as ‘cable’ by Forex traders, is the third most popular Forex pair in the world, after the EUR/USD and the USD/JPY, which makes it one of the most interesting currency pairs to focus on.
The GBP/USD currency pair is the exchange rate between the GBP, the base currency, and the USD, the quote currency. The exchange rate of the currency pair represents how much 1 GBP is worth in USD.
Remember, the base currency is always equal to 1 unit, and the value of the quote currency always fluctuates in relation to the base currency.
Trading Hours of the GBP/USD
Trading the GBP/USD can be done around the clock during the week, but some trading hours can see increased volatility and trading volume. This is the case with trading sessions such as the London session and the US session (sometimes referred to as the New York session) and, in particular, when these two sessions overlap (both sessions generally run between 8 am and 4 pm local time, though do bear in mind that cash market trading hours can differ). Interestingly, a point where trading activity can increase is the ‘session overlap’: when the two sessions are open simultaneously, between noon and 3 pm GMT.
The GBP and the United Kingdom
The GBP is one of the oldest currencies and is the official currency of the United Kingdom (UK). Despite its small size, the country is a major international trading power and the second-largest economy in Europe. On 23 June 2016, Brexit was approved (a combination of the words ‘Britain’ and ‘exit’). As a consequence of this vote, the United Kingdom left the European Union on 31 January 2020.
In 2022, the United States was the largest UK export market for goods and services (20.9%), followed by Germany (6.9%), the Netherlands (6.8%), and Ireland (6.6%) according to the Department for Business & Trade of the UK. The top 3 goods exports were precious metals, cars, and crude oil, and the top 3 service exports were other business services, financial services, and travel services.
The USD and the United States
The USD is the dominant currency in global trade and also serves as one of the world's key reserve currencies. Behind China, the United States is the 2nd largest trading country. It is also the 2nd largest exporter and the largest importer in the world.
In 2022, the largest consumer of American goods exports was Canada ($356.5 billion), followed by the European Union ($350.8 billion), Mexico ($324.3 billion), and China ($150.4 billion), according to the Office of the United States Trade Representative. When it comes to services exports, Ireland is the largest buyer ($83.1 billion) - without taking into account the European Union ($238.6 billion), followed by the United Kingdom ($80.9 billion), Canada ($69.5 billion), Switzerland ($52.4 billion), and China ($42.2 billion).
Fundamental analysis is used by traders and investors wanting to find the intrinsic value of a financial instrument to determine whether this asset is currently over-valued (potential short-selling opportunity) or under-valued (potential buying opportunity) by market participants.
If you want to use fundamental analysis for trading the GBP/USD, you first need to gain a better understanding of the economic conditions and growth prospects of each respective country. Fundamental analysis in the Forex market begins with the respective central banks, which in this case is the US Federal Reserve (or the Fed) and the Bank of England (BoE). The guidance and monetary policy decisions are key to understanding the supply and demand of a nation’s currency and generally dictate the longer-term trend for a currency.
For instance, if the Bank of England raises interest rates but the Federal Reserve decides to keep its rates unchanged (or to cut rates), then the GBP/USD will likely rally. The Fed has recently signalled that it may cut interest rates three times in 2024, as inflation has been softening towards its 2% goal. But the story is different in the United Kingdom. The BoE has indeed declared that it still has work to do for inflation to get back to its 2% target, and that interest rates are likely to stay restrictive for some time in 2024.
To help understand the health of a country’s economy, traders and investors study economic aggregates, macroeconomic statistics, such as inflation (CPI and PPI, for example), growth data (Gross Domestic Product [GDP]) and unemployment. All of this economic data can be accessed through an economic calendar, which at the most basic level, offers the time and date of each economic event, together with prior values, the median estimate for the event and the actual release value.
Political events, major elections and natural catastrophes are other fundamental factors to keep an eye on.
Alongside fundamental analysis, technical analysis is another popular market analysis method. It’s all about analysing the price action of an asset to identify the main (primary) trend to help forecast future price direction.
Technical analysis is especially used by active short-term traders seeking to exploit volatility in their intra-day short-term trading strategies. Common trading styles for short-term market participants include scalping and day trading. However, it is important to note that technical analysis is also employed across the board. While short-term traders predominantly use technical analysis, so do swing traders (a medium-term trading style) and position traders (more of an investment approach), though the latter two trading styles tend to incorporate a blend of technical and fundamental analysis.
Trend analysis is a common approach to employing technical analysis. Sketched on a price chart to link successive higher lows in an upward trend or consecutive lower highs in a downward trend, trendlines can serve as a valuable tool for identifying the prevailing trend, as well as identifying potential points of trend reversal.
Support and resistance levels, sometimes described as potential floors and ceilings for price action, also play a pivotal role in technical analysis and often form the backbone for many technical trading strategies. If there is robust buying interest, a support level has the potential to halt declining prices and push the currency pair upward. Conversely, a resistance level is capable of hindering ascending prices if there is high enough selling interest, causing the price to retract.
Traders can also add various technical indicators to their charts, as they provide an additional layer of information, such as Moving Averages, the Relative Strength Index (RSI), Bollinger Bands, and the Moving Average Convergence Divergence (MACD), among others.
Source - database | Page ID - 37508