The GBP/USD pair is a major currency pair, as it is a cross of the British Pound and the U.S. Dollar. Both are two of the most widely traded currencies across the global, which means that liquidity, or the amount of investors buying and selling the GBP/USD, is fairly strong.
As such, the average spread retail traders typically pay on trading one standard lot GBP/USD is 2.6-2.9-pips, and this spread is lowest during the European to North American trading hours, from 07:00 GMT to 20:00 GMT. Outside of these hours, in which Europe is only open, both Europe and North American are open, and then only North America is open, the spread retail traders pay to trade one standard lot of GBP/USD tends to rise, especially from 21:00 GMT to 06:00 GMT.
Factors Influencing the GBPUSD Pair
Like any other major currency pair, the most important factors that determine the GBP/USD’s price are the local interest rates in each economy. The Bank of England decides the U.K. interest rates typically on the first Thursday of every month. Similarly, the Federal Reserve, the world’s most influential central bank, meets ten times per year, or once every five weeks. A decision to cut interest rates or increase accommodative monetary measures has historically been negative for the local currency.
This could also be accomplished through a balance sheet expansion known as quantitative easing. For example, if the Federal Reserve openly discusses measures to ease monetary policy, through mechanisms such as quantitative easing, or QE, the GBP/USD tends to rise (this is a negative-U.S. Dollar event); on the other hand, when the Bank of England moves to ease its policy, the GBP/USD tends to fall.
The basis for the monetary policy decisions and therefore also an important factor for the pair’s price is each economy’s output, or gross domestic product (GDP). Inflation levels are also important factors for the central banks when making rate decisions and consumer price Index (CPI) results will therefore strongly affect trading. A higher GDP or higher inflation rate both suggest no monetary action or possibly even raising interest rates, and are therefore currency positive.
Additionally, other releases that affect trading are indicators that tell of the health of the economy. Higher retail sales and a low unemployment rate, mean a strong economy. The U.K. Production Managers’ Index will indicate future GDP reports. The producer price index will also give clues to inflation changes, but are not as definitive as the CPI. The U.S. Dollar, on the other hand, is more sensitive to reports on consumer confidence and spending, as nearly 70% of the U.S. headline growth figure is rooted in consumption.
Analyzing GBP/USD Charts
While each economy dictating the GBP/USD’s price action are on different continents, financial ties between the United Kingdom and the United States are strong, thus making many of the influencing factors common. Both economies are heavily influenced by the European sovereign debt crisis, for example, even though neither the United Kingdom nor the United States uses the Euro.
The Sterling is considered a safe haven currency when compared to the Euro, but will trade as a risky currency when compared to other safe havens like the U.S. Dollar. Therefore, the British Pound will benefit more than the U.S. from good news out of the Euro-zone; while the U.S. Dollar tends to strengthen over the British Pound (or the GBP/USD depreciates) when there is bad news out of the Euro-zone.
On the GBP/USD daily chart, the pair has been moving generally lower over the past year, although prices have consolidated and moved higher since June 1, consequently a major low for 2012. Nevertheless, with a descending channel in place, and economic conditions and monetary policy unlikely to be altered in major ways that would suggest that this channel is to break, it is likely that the GBP/USD trades towards its median target of 1.5150 by March 1, with a broader range of 1.5050-1.5250 by said time.