Why Should You Care About GBPUSD?

Why Should You Care About GBPUSD?
Why Should You Care About GBPUSD?

GBPUSD or GBPUSD is the notation for the pair of currencies consisting of the Great Britain Pound and United States Dollar. Traders will simply call it trading the “pound,” but it’s often called “cable” in reference to the first transatlantic cable. The value shows how many dollars (the quote currency) are needed to buy a pound (the base currency)

Characteristics of GBPUSD

The GBPUSD is one of the top-five most traded currency pairs, and also among the most liquid. While the dollar naturally represents the country with the largest economy in the world, Britain is by comparison just the seventh largest. However, London remains the busiest financial hub in the world, and fluctuations in the British currency can influence UK stocks and vice versa.

Before the creation of the Euro, this pair was the most heavily traded, and still gets a lot of attention. Cable tends to have higher spreads – but higher volatility in the short term, making it popular among day traders.

While the US dollar is seen as a safe haven currency, the pound, despite an even longer tradition of fiscal responsibility on the part of the UK government, is not seen in the same light. Additionally, the UK has a long-standing pending issue with its separation from the EU, and that keeps investors on their toes.

The Big Players

Monetary policy for the pound sterling is set by the Bank of England (BoE) which targets an inflation rate of around 2%. The BoE has maintained one of the longest accommodative cycles following the sub-prime crisis and recently raised rates for the second time in a decade.

The US dollar is subject to regulation by the Federal Reserve (Fed) which has what is referred to as a “dual mandate” of maintaining low inflation and keeping unemployment at a structural level. As a result, the Fed will intervene not just to control inflation, but to support the economy in order to influence the unemployment rate

What Makes the Currencies Tick

Until recently, price differentials between the pair was driven in part due to the divergence in monetary policy between the Fed and the BOE; however, it seems the later is about to embark on a normalization trend – however, the pace might be slower than that of the US, leaving a substantial difference in policy.

The other major factor to influence the pair is Brexit; the uncertainty around how, if and when the divorce with the EU will be achieved keeps traders scanning the news constantly. Expectations of negative impact from the process, the related uncertainty and the potential for new trade deals all push the currency in different directions.

By contrast, the relative steady economic growth from the world’s largest economy leads to some comparative consistency in the relative value of the dollar. In general, cable moves in relation to the latest news from the UK.

To get a full list of the events that could influence this pair, check out Orbex’s economic calendar, and don’t forget to have a look at the trading tips section of the website for more information on how to trade the GBPUSD.

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