GBPUSD, sterling or “cable” is the currency of the United Kingdom and has being the staple of forex trading for a number of years. In this post we will answer the question of how to trade GBPUSD.
Of course, trading GBPUSD is an entire discipline in itself and needs an in depth analysis of a number of different factors. However, there are some essential ways in which the trader can make profits with GPBUSD trading. These include an understanding of technical and fundamental analysis.
Currencies like GBPUSD is impacted by a number of factors including economic news, price trends, central bank policy and general market risk conditions. The GBPUSD pair has also taken on a great deal of interest lately given the volatility in the currency post the Brexit vote.
GBPUSD Fundamental Trading
Fundamental analysis is the study of underlying dynamics which impact on the long term value of an asset. This is the investing principle of individuals such as Warren Buffet and Benjamin Graham.
When it comes to forex, the fundamental factors are those that impact on the currency due to the perceived long term supply and demand. For example, the factors such as interest rate, inflation, economic growth and consumer sentiment. When there are changes in any of these variables, this has an impact on the supply and demand of the currency in question.
In order for the GBPUSD trader to make money on fundamental analysis, they have to keep a list of all the important economic announcements coming from both the USA and the UK. These news announcements will have a “price action” impact on the currency and allow the trader to enter positions that could benefit from it.
We will take a look at some of the most important fundamental economic indicators for GBPUSD trading.
Given that the USA is the biggest economy in the world, the US economic growth will impact on the value of many currencies but mostly on the US dollar. This is because economic growth will generally lead to more demand to hold a particular currency.
There are a number of economic indicators which impact on the view of what will happen with US Economic growth. These are such indicators as the Non-Farm Payrolls (NFP) and GDP numbers. These indicators are followed by traders almost religiously and have a large impact on the global markets.
The best way to trade these indicators is to trade based on expectations and realisation of the numbers that are actually released. This is price action trading. Hence, traders will adjust if the numbers are greatly different from the expectations.
So, for example. If the US GDP growth had a median forecast of 1.3%, this would mean that most economists had a view that growth would be in this region. However, if the actual GDP number was 1.6%, this is a positive surprise. The trader can then expect the markets to rally and the US dollar to appreciate against the Pound (GBPUSD decreases).
On the flip side, if the number is far below the expectations then there will be a fall in the US dollar. The trader could do one of two things. You could have a view prior to the announcement of the numbers and enter the trade hoping that the numbers will confirm his view. Alternatively, the trader can enter the position immediately after the announcement and take advantage of the market reactions.
When looking at the other cross in the Forex pair, GBP, UK economic growth will have an impact on the Pound. The same discipline works for the traders who are looking to take advantage of price action in these pairs. This will also be quite an important factor as the UK goes through the Brexit negotiations and leaves the EU. The GBP numbers will be very important and keenly watched for traders and economists.
UK/US Interest Rates
Fundamentally, a trader gets a benefit from holding a currency in a bank. This is the interest rate on the currency. This interest rate is driven by the base rate that is set by the central bank in the country.
In the US, this is the Feds fund rate and in the UK it is the Bank of England base rate. These are the rates upon which most fixed income instruments, investments and deposits are based.
Hence, traders usually take note of what the central banks are going to be doing with their base rates. These are usually announced in press conferences and are quite a spectacle. Hence, the traders trade GBPUSD when Janet Yellen or Mark Carney are given a speech just before they announce the rate.
Hence, from a price action perspective, these press conferences are a good chance for the trader to take enter positions based on what they think the central banker will ultimately do.
Taking a look at an example, assume that the Fed held a press conference and everyone was expecting there to be an increase in interest rates. However, when Janet Yellen was speaking, she was striking a more “dovish” tone on inflation (explained later).
This means that she may be unlikely to increase the base rate and traders would then have to adjust their expectations down. The dollar will fall and hence GBPUSD will increase. This is because investors would be less likely to hold a currency that was paying a lower interest rate.
Inflation data like CPI, PPI and Core is important for the impact that it has on the above interest rate. Inflation is the general increase in prices and is one of the main factors as to why they would decide to change it. As such, it is monitored by traders to get an idea of how the central bank will react with the interest rates.
A central bank such as the Fed or the Bank of England (BoE) will either be dovish or hawkish on inflation. When a central banker is hawkish, it means that they are generally concerned whereas when they are dovish they have less concern.
GBPUSD traders will take into account whether the central banker in question sounds bullish or bearish and will adjust their positions accordingly.
For example, if you know that the BoE is particularly hawkish and the inflation numbers that come out are higher than expected then you can believe that interest rates are more likely to increase. This means that demand for GBP will increase as shown above and hence GBPUSD will increase.
Generally, CPI is one of the most followed inflation numbers as it is inflation rate that impacts on consumers and is the one that the central bankers are most concerned with.
Technical Trading of GBPUSD
Technical analysts or “technicians” take a look at previous prices and try to make a forecast of how future price trends will develop based on this. It follows the assumption that patterns tend to repeat themselves.
Technical analysis is also one of the most used techniques of day trading forex traders. They will adjust the charts that they have and take a look at individual candlestick analysis. They will try to spot particular patterns on GBPUSD and place trades based on that.
Technical analysis also works quite well for those currencies that are very liquid such as the the dollar and pound. We have previously covered some of the aspects of technical analysis when we looked at option strategies but we will go over some of the most important technical indicators for GBPUSD below.
Resistance and Support
Resistance and support levels are some of the most recognised aspects when one is looking at moving average indicators. These are the levels that the trader can identify where GBPUSD will either not be able to go above or not fall below.
The trader will monitor the performance of the individual candlesticks around these levels and based on a number of characteristics they will decide whether the asset will remain above / below these levels or rebound.
Resistance and support levels can be formed over a long time period as well as a shorter horizon. GBPUSD traders can also combine resistance and support levels with other patterns such as the flag and head and shoulders.
As mentioned, chart patterns are some of the staples of technical GBPUSD trading. Technical traders have extensive books with a collection of numerous patterns.
Important patterns to look for include the triple bottom, double top and head and shoulders.
Changes in trading volume is of great importance to the technical trader. This is because it is usually seen as an important precursor large moves in the price of the asset. Volume is the total amount of people buying and selling the pair in that time period.
Volume is also combined with a number of other technical indicators to confirm whether a trend is indeed strong or is destined for a rebound. For example, if the trader observes that GBPUSD has breached an important resistance level, whether this is indeed a break above is determined by how much of a volume increase there is behind that move.
If however, the volume on GBP is not as much as the trader would expect the chances are that the break above the resistance level is a mere anomaly and there is less conviction in the movement.
Volume is sometimes also used as a function input in other technical indicators such as the money flow index. It is also quite important for those traders who want to place Gap trades. These are when a currency “Gaps” up or down.
Gap trades happen when there is low volume in an illiquid market such as late at night or on an early Monday morning. Indeed, there was a really significant gap movement in GBPUSD after the Brexit vote towards the end of last year. This happened in the early hours of the morning in the Asian market.
A trader who was monitoring GBPUSD at that time could have picked up the pound at a severely depressed price. Indeed, GBPUSD rebounded a few minutes after the fall when volume and liquidity started to pick up again.
Choose a GBPUSD Broker
Trading GBPUSD effectively requires a broker with an effective trading platform that has all of the tools required in order to do chart analysis. The broker platform should also have market news streamed onto it including economic data releases and central bank announcements.
We at FXAxe have an extensive list of reputable brokers that have been reviewed and received our own rating. Take a look at the brokers below and open a demo account. This will get you well on your way to trading GBPUSD profitably.