The British pound/US dollar pair is one of the most liquid currency trades in the forex space. Tight bid-ask spreads, volume and volatility, all ensure the day trading popularity of GBP/USD. This page will break down everything you need to know about investing, from the history of the GBP/USD pair to its benefits and risks. Strategies will also be offered, including technical analysis and trading hours. We’ve listed the best GBP/USD brokers below.
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Why Day Trade GBP/USD?
There are many reasons why thousands of people head online to day trade the GBP/USD every day. Some of the biggest benefits are detailed below.
- Volatility – You will often find a wider price range with GBP/USD compared to other major pairs. This is in part due to unpredictability and volatility. Both of which result in higher spread quotes from forex brokers.
- Relative safety – As two of the most modern economies in the world, the GBP/USD offers a multitude of resources for finding price information and data.
It is thought approximately 40% of the volume traded in the FX markets goes through London. This means volume and volatility, both of which can be used to turn a profit.
- Diverse trading vehicles – The GBP/USD is one of the most liquid, cash-rich currency pairs available and the third most traded major currency pair, consisting 9.6% of total FX trading volumes. This means a wide range of investment vehicles and opportunities are available.
- Maneuverability – Those day trading the GBP/USD will benefit from a sizeable number of pips in a single move compared to other major pairs. This makes it ideal for breakout trading. However, it also brings risk, so utilizing stop losses is essential.
- Availability of resources – Conducting technical analysis is easier than ever before. You have graph history, long-term charts, and 1-minute data just a few clicks away. Also, news resources and trading forums will offer predictions for today and long-term forecasts.
Drawbacks & Risks
Trading the GBP/USD forex pair appeals for many reasons, but there are also risks to be aware of:
- Rapid movement – The GBP/USD can move quickly. While this is great for fast, decisive traders, it also means you can lose money quickly. You need to be disciplined to counter this, employing effective risk and money management strategies.
- Report heavy – The pair often responds significantly to UK economic reports, especially when data does not marry with monetary policy speculation and expectations.
- Ambiguity – The volatility of the GBP/USD often results in false signals and breakouts.
Traders who lack experience may become victims of misleading movements. Some argue that beginners should focus their attention on other currency pairs.
So, day trading the GBP/USD may offer plenty of profit potential, but it does have its drawbacks. Those investing in the currency pair should be aware of both sides of the coin before risking their capital.
Influences on Movement
As you have probably gathered without the use of GBP/USD 20-year, 50-year, and 100-year charts, several factors shape market sentiment and prices. The most influential of which are as follows:
- Economic growth – When the US economy appears stronger than the UK’s, the dollar typically rises against the pound. Similarly, when the UK economy outperforms the US, the dollar usually weakens against the pound. Interest rates, labor productivity, and increased investment can all boost growth.
- Political events – As seen with Covid-19, political decisions can trigger movement in the GBP/USD currency pairing. Major elections, for example, can also have a noticeable impact.
- Monetary policy – The actions of the Fed (the US Federal Reserve) and BoE (Bank of England) can seriously influence rates.
Currency Correlations
What may not be clear on your GBP/USD real-time chart is the impact of “currency correlations.” This may just be a phrase you have come across in forums.
Because currencies are priced in pairs, no single pair is totally independent of the others.
For example, if you are trading the British pound against the Japanese yen (GBP/JPY), you are actually investing in a derivative of the GBP/USD and USD/JPY pairs.To some extent, GBP/JPY has to be related to either or both of the other currency pairs.
Calculation
Correlation is a statical measure of the relationship between currency pairings.It can range from -1 to +1.The former suggests the currency pairs will move in the opposite direction, while the latter means they will move in the same direction.If the correlation is zero, the relationship is arbitrary.
The most efficient way to get your head around currency correlations is to calculate them yourself.Fortunately, it is relatively straightforward.An Excel spreadsheet will be your calculator, as you can use the correlation function (=CORREL).Once you have that, do the following:
- Input pricing data for your two currency pairs, for example, GBP/USD and EUR/USD
- Create two individual columns, each titled with one of the pairs
- Now fill the columns with the past daily prices over the time period you are using
- In an empty box at the bottom, type in =CORREL
- If you highlight all the data in one of the columns, you will get a range of cells in the formula box
- Then simply type in a comma
- Follow steps 3-5 for the other currency
- Now close the formula.It should then look like =CORREL (A1: A25, B1: B25)
- The final figure you get is the correlation between the two currency pairs
It’s also worth keeping in mind that over time correlations can change.
This can be as a result of monetary policy, plus economic and political factors.
Day Trading GBP/USD Strategy
Whatever your trading plan, whether it relies on weekly pivots and analysis or historical data in Excel and 5-year averages, all the points and examples of strategy below can be of use.
Timing
Because the forex market is open 24 hours, there is a frequent notion that you should be trading GBP/USD all day. That is not the case. Day traders that succeed will focus on moments when there is adequate volatility and volume to make more than the spread and/or fee.
Spreads widen in calm times and narrow in hectic times. So, instead of trading from Sunday evening through Friday afternoon, select specific periods. The best window is when both the UK and US markets are open. The ideal time to day trade the GBP/USD is between 8:00 and 10:00 GMT, plus 12:00 and 15:00 GMT. The most important daily changes are here, and spreads have little impact on profit.
So, whichever method you choose to determine support and resistance levels, trading during busy times frequently has the most profit potential.
Trading Breakouts Strategy
There is ample opportunity to day trade breakouts with the GBP/USD currency pairing. You need to look for solid risk-reward ratios. For example, risking 25 pips, but aiming for 100 pips if correct.
Opt for an aggressive 1:4 risk/reward ratio as above, and you can be right far less. On top of that, don’t risk too much capital per trade.
Many suggest investing no more than 1-2% of your account balance on a single transaction. That way, you will protect yourself from losses and ensure you live to fight another forex day.
Trading News
Those less interested in day trading GBP/USD might choose 15-minute and 1-hour charts with technical forecasts. But instead, you can trade on today’s news. This article has explored several of the GBP/USD influences. For example, economic data on the UK unemployment rate, manufacturing growth, consumer sentiment, and expenditure will all affect the needle.
Google Finance, Yahoo Finance, DailyFX, and Bloomberg provide live forex news updates. You may get an advantage if you can respond faster than the market. They also provide GBP/USD rates, forecasts, and the commentary you need to evaluate your positions.
In addition, whether your strategy revolves around wave counts via Elliot wave analysis, or breakout strategies, getting the latest forecasts, for this week and next will put you in a stronger position. Many of the news sources mentioned above provide excellent services to this end.
Forecasts
Long-term forecasts can often provide a strategy or at least single trades. Major users of the forex markets are utilizing the same long-term forecasts and economic outlook predictions. So, governments or corporations exchanging currency are doing so based on similar price movement expectations. This can often lead to self-fulfilling forecasts as those larger trades are either all being held, or all being pushed through.
One word of caution here is that too much reliability is placed on economic experts.
If their predictions were properly recorded and tested, they might not be as reliable as people think.
4-Hour GBP/USD Strategy
You may want to view both a 4-hour and daily chart.Investors will use both to make decisions.The daily time frame will help identify the main trend while the 4-hour timeframe will be for entering positions.
You then need two forex indicators:
- Use a slow stochastic indicator with the following (13, 5, 5) settings applied to both charts
- Also, use an exponential moving average 4, EMA 14, and EMA 50 on the 4-hour chart
Selling Rules
- Once the 4 EMA crosses 50 EMA, followed by 14 EMA to the downside on your 4-hour chart, then place a sell trade at market order.Alternatively, place a pending sell stop order on the opening of the new candlestick
- Enter a stop loss at 50 pips
- Profit can be taken at 150 pips, which is three times what you risked
Buying Rules
- Once 4 EMA crosses 50 EMA, followed by 14 EMA to the upside on your 4-hour chart, place a buy trade at market order.Alternatively, place a pending buy stop order where the new candlestick opens
- Again, place a stop loss at 50 pips.
- Profit can be taken at 150 pips
If the trend is strong today, you’ll make a decent number of pips.Because you enter on or just after where the exponential moving average crossover takes place, you enter as the trend starts and not halfway through.
For more guidance, see our strategy page.
History
Early Days
To effectively day trade on the GBP/USD, also known as the ‘cable’ (named after the transatlantic cable laid between the two nations), it helps to understand their turbulent relationship.
Trade has existed between the two currencies for so long there is no way to put forward an original pound dollar exchange rate.
It wasn’t until the early 1970s that the concept of the GBP/USD we know today existed. Change was brought around by the transition to floating exchange rates by both the US and UK.
Before 1971, foreign exchange rate history was tied to the value of gold. This was a result of agreements reached in 1944 at the Bretton Woods Conference. The effects of which would have implications on the GBP/USD for nearly three decades.
With the end of Bretton Woods, the GBP/USD exchange rate became more volatile. During the 1980s, the pair’s prices moved widely. Several events in 1985 caused these fluctuations:
- British scientists in the Antarctic uncovered a hole in the ozone layer
- The first mobile phone call in Britain was made
- Miners ended their strikes
Impact
So, what went on in the US?
- The 1970s brought the rise of Organisation of Petroleum Exporting Countries (OPEC) and oil prices. However, at the same time, an oil shortage restricted economic output
- The 1980s kicked off following an extended state of unease in the US economy
- Following the Vietnam war, unemployment rates were high. This was coupled with the Federal Reserve System (Fed) failing to introduce measures to ease rising inflation
Exchange rates reflected Britain’s prosperity and America’s failure. As expected, the pound rose versus the dollar.
But then Reaganomics restored the status quo. High-interest rates were one of the key changes.
Following tax cuts and military spending, the US economy boomed again. By 1985, the US dollar had risen 50% against leading currencies.
1990s Intervention
As part of the Exchange Rate Mechanism (ERM), the BoE boosted sterling’s value against the German Deutschmark. In a recession, higher interest rates were insufficient.
George Soros and others quickly saw the BoE’s predicament. His response: pound short. On September 16, 1992, Britain quit the ERM, abandoning expectations of sustaining the pound. In only one day, the pound lost 25% versus the dollar.
This all helps emphasize the use of historical facts and data on future GBP/USD outlook and forecasts.
2007 Crisis
A sub-prime crisis occurred before the 2008-2009 worldwide downturn. By summer of 2007, many big US financial firms were in danger. Because the worldwide consequences were not fully grasped, the pound gained versus the US dollar for much of 2007. In November 2007, it stood at 2.1163. After assessing the impact, the BoE slashed the bank rate to 0.5 percent and launched quantitative easing (QE).
Brexit
Another significant milestone came with the 2016 Brexit decision. The GBP/USD exchange rates and prices quickly shifted. The pound’s value sunk against the US dollar and other major currencies. Against the US dollar, the pound fell from $1.466 to $1.3694 when the result was announced. It then dropped to $1.2232 by October 2016, a fall of 16%. By the middle of 2017, the pound had stabilized.
Covid-19
The epidemic has placed even the most developed nations in peril, and market volatility has risen and fallen with it.
Generally, countries with more instances saw their currencies fall, while those with less cases saw theirs rise. The impact on global trade, tourism, and hospitality has been significant. As a result, the GBP/USD became more volatile and unpredictable.
Once both countries implemented vaccination programs and cases have subsequently decreased to relatively low levels, the economies recovered, and the pair’s price movement stabilized.
Regardless of the pandemic, the all-time high of the GBP/USD was reached on 6th of March 1972 at $2.64 and the all-time low on the 25th of February 1986 at $1.05.
Understanding how events influence trading on your GBP/USD forex index system can prove helpful. Quite simply, whether you are based in the UK, US, Europe, or elsewhere, having the context will make those live trading rates make more sense.
Role of the Great British Pound
Despite its small size, the UK has one of the world’s largest economies. It is vital in international financial markets, and London is the FX capital. For nearly a century, the UK was the world’s economic superpower. The British pound was then the unofficial reserve currency. During the two world wars, the UK declined, while the US grew as the world’s main economic power.
Government rules and labor market restrictions also harmed the UK economy. London’s rise as a worldwide financial powerhouse has helped stabilize the economy since then. It also helps that the UK is the second-largest oil and gas producer in Europe after Norway.
Role of the US Dollar
A fundamental part of GBP/USD trading economics is understanding the US dollar’s crucial role.
It is of great importance for the following reasons:
- OPEC conducts transactions in US dollars
- It is the most prevalent currency in popular pairs
- It is the world’s second-largest trading nation after China
- Some smaller countries peg their own currency’s value to that of the US dollar
- Giant global banks will hold a substantial percentage of currency reserves in US dollar
- The live price of gold and other popularly traded commodities are often set in US dollars
- It is considered the world’s reserve currency and used to settle a huge portion of international transactions
- The US is a significant world player in petroleum, automobile production, aerospace, construction, electronics, telecommunications, plus construction and agricultural machinery
FX day traders, therefore, need to understand what influences the US economy to forecast in which direction the US dollar will go.
You should consider the following economic indicators:
- Retail Sales
- Trade Balance
- Non-farm payrolls
- ISM Manufacturing
- Producer Price Index
- Industrial Production
- Consumer Price Index
- ISM Non-Manufacturing
- Federal Reserve Minutes
Final Word on GBP/USD Day Trading
As two of the most widely traded currencies in the world, the GBP/USD currency pairing attracts day traders from all over. Narrow bid-ask spreads and a generous choice of trading vehicles, including futures and options, will continue to reel in aspiring traders. However, to profit in the crowded forex market, you will need to find an edge.
Live chart investing is never straightforward.
So, day trading during specific periods and utilizing volume will allow you to bring meaning to price fluctuations.
Using signals and trends will also help you spot promising financial opportunities.
If you can do all that while overcoming the numerous risks, you may be taking the first step to joining the likes of successful forex traders, such as Micheal Marcus and Paul Tudor Jones.
You may also want to see our forex trading page for further guidance.
FAQ
What Is The Best Time For Trading GBP/USD?
The most volatile time to trade the pair is when both the US and London markets are open simultaneously. This is between 08:00 and 10:00 GMT, plus 12:00 and 15:00 GMT.
When Shouldn’t You Trade GBP/USD?
One of the worst times to trade GBP/USD is the first or the last day of the week.
This is because investors are slowly returning to the market, Monday can have low volatility and fewer opportunities for profits. Friday is also bad because of the over-weekend risk, when you won’t be able to close your positions. The market can also create significant gaps at the beginning of the week.