As one of the most important pairs in the currency market today, understanding the basics of the British economy, and the GBP USD pair is crucial to becoming a successful forex trader.
Below we present a live flash chart of the currency for you to explore at no risk or cost at your convenience, before moving on to the ensuing discussion of its background, advantages and disadvantages as a trading medium.
The British Pound
The British Pound, or the pound sterling in official contexts, is the currency of the U.K. Originating from the term libra used in Roman times, the pound was at first a measure of weight. In time it rose to become the currency of the British Isles, and as the British Crown acquired its overseas empire, for while it was the most prestigious currency in the world. A study issued by the House of Commons Library claims that between 1750 and 1914 there was no perceptible long-term fall in the pound’s value. By contrast, since 1945, “prices have risen in every year, with an aggregate rise of over 27 times.” Today the U.K has a GDP of about $2,67 trillion, with a nominal per capita income level of $43 thousand. The nation runs a sizable trade deficit at over $150 billion.
In part because of the U.K. role as a financial center of great importance, partly due to its imperial legacy, the pound sterling shares the privileges of being a reserve currency with the Swiss Franc, and the Japanese Yen, with about four percent of global reserves being denominated in the GBP as of 2008. The currency has been hard-hit by the turmoil of 2007-2009, however, and has fallen from a 26-year peak of 2.1161 to USD to1.65 as of Nov 2009, with the lowest point touched at $1.35 in January of the same year.
The GBP also shares the unfortunate distinction of being the target of speculator attacks during the 90s with some Thirld World currencies, especially during the chain of events leading to the infamous Black Wednesday.
The US Dollar
The U.S. Dollar is the global currency of trade, the world’s reserve currency,
and also a symbol of the might of the world’s most powerful nation. The global financial system, composed of international organizations such as the World Trade Organization, the IMF, and the World Bank, was built on the expectation that the U.S. would continue to dominate the world economy.
Today the United States is the largest economy in the world, but suffers from high unemployment (at over 10%), a banking sector with ailing health, recent asset price deflation, and ongoing wars in different parts of the world. With interest rates at very close to 0%, many traders and analysts are questioning the long-term viability of the dollar as the world’s currency, as expectations of high inflation lead to significant depreciation in the currency. Nonetheless, the U.S. is still the dominant economic power of the world, and there are no serious international plans underway to dethrone the dollar from its status as of now. With over 2/3 of central bank assets denominated in the dollar, no government in the world has a clear advantage in seeing the U.S. currency depreciate without recovery.
Trading the GBPUSD pair
The GBPUSD pair has only a limited correlation with EURUSD, so it is possible to make a basket of the two provided that high leverage is avoided. Both the Russian central bank, and Middle Eastern sovereigns are very active in the pair, and tend to intervene at points of extreme positioning. Reversals are common when the market is made of aware of the presence of these actors, or when rumors of the same circulate. The pair is more suitable to a scalping strategy than the EURUSD pair due to the higher degree of volatility experienced (although this would depend on scalping style). It tends to enter long-lasting trends every once a while, so long-term traders will also find fertile grounds for their schemes, although high levels of volatility may be testing to one’s nerves. You can also trade it in a carry trading strategy, since the Bank of England offers higher rates than the Fed most of the time. In sum, the pair is a good and flexible choice for most trading strategies.
See more forex charts
If you’re interested in learning more about the subject, and discovering some excellent brokers that offer this pair for trading, please visit our broker review section for in-depth analysis and commentary.