intro – gbp usd:
GBP USD or Sterling Dollar is one of the most popular currency pair by traded volume in the world. Both GBP & USD are Reserve Currencies. This means that Central Banks and other Monetary Authorities around the world hold significant amounts of GBP and USD as part of their foreign exchange reserves.
To begin with, we will take a look at the history and other interesting facts about GBP USD. We will then look at the most important variables and factors that influence GBP USD prices. Finally, we will investigate how central bank policies and actions in US and UK influence GBP USD movement.
a detour back in time
GBP was the primary reserve currency of the world in the 19th and for most part of the 20th century. The pound sterling is the world’s oldest currency still in use. The first pound coinage was minted in late 15th century. Accordingly, the pound sterling’s value was determined by the market value of one pound of silver.
However, latter decades of the 20th century saw emergence of USD as the new primary reserve currency of the world. The rapid industrial and technological development of US economy in the 20th century, led to a huge demand for natural resources. Hence, in time USD became a globally accepted currency for global commodity trading. This high demand for USD around the world has allowed US government to borrow at low costs.
Cable is a very well known name for GBP USD pair. It finds it’s origins in July, 1866 when the transatlantic cable became operational. This enabled transmission of GBP USD exchange rate between London and New York fx exchanges. Thereby creating a cross border GBP USD market.
Inspite of being a member of the EU, UK never adopted the Euro. This was due to concerns about losing control of monetary policy to a centralised European Central Bank. However, London has remained the hub for Euro clearing at the time of writing this article.
back to today
GBP USD is one of the “fx Majors”. The others being EUR USD, USD JPY and USD CHF. This means that it is one of the most actively traded currency pair in the world. Hence, this makes the GBP USD market liquid and efficient. This ensures price can be reached at convergence of buy and sell orders from market participants without any government or central bank interference.
This also implies that, Stokai algorithms can predict future price movement of this market by analysing macroeconomic factors. In other words, GBP USD market is very sensitive to macroeconomic factors.
The best time to trade GBP USD pair is when the market is most liquid. This is during the overlap period of US and UK working day. This also ensures you get the smallest spreads from your broker. Cable has come a long way from it’s 1866 copper roots. Today transatlantic communication happens through optical fibres and satellites, making GBP USD prices, real time.
variables and factors that impact GBP USD market
trade volume
Firstly, the trade volume between UK and US dictates the demand for GBP and USD respectively. There are strong historic, linguistic, cultural and economic ties between the two nations. Both economies have similar and well respected corporate governance standards and large services sector that generate the bulk of annual GDP.
In addition, major international – commercial and investment banks have legal entities in London and New York. So, a very large volume of credit is raised in these two renowned financial centres and a very active overnight Repo market creates high demand for both GBP and USD.
inflation
Secondly, domestic inflation in UK and US also impacts the GBP USD rate. Higher inflation depreciates the value of the currency. So, if the inflation in UK is higher then GBP USD price will move south. On the other hand, if the inflation goes down in the UK, all things being constant, GBP USD price will go up.
interest rates
Thirdly, short and medium term interest rates will impact the GBP USD price as higher rates in any currency will increase the demand for that currency. As a result, the domestic currency’s value will appreciate. For instance, if the rates in US go up, and all other factors are static, a British Bank with it’s branches in the US may park their cash reserves in their US entity earning interest. Consequently, this will cause a spike in demand for USD and drop in demand for GBP.
and the rest
Finally, other factors such as unemployment rate and PMI(Purchasing Managers Index) also impact the value of GBP USD. Unemployment rate(in addition to per Capita GDP) is a measure of how much disposable income the consumers have, that they can spend on foreign goods . For instance, lower unemployment and higher per Capita GDP in US will increase demand for travel to London, and so, a higher demand for GBP. So, GBP USD rate will rise.
Meanwhile, a higher PMI in US will mean an increase in economic activity in US leading to higher employment and a high demand for USD to pay those employees. So GBP USD rate will fall.
impact of Monetary Policies
Traditionally, the monetary policies of the US Federal Reserve and Bank of England have been very similar. This is because of strong links between US and UK financial sectors and similar economic structures. As a result, this has led to financial crisis in one region finding its way to the other. Hence, causing similar monetary polices to be applied in both economies that impact GBP USD rate.
For instance, lowering of rates to increase supply of credit and thereby reducing burden on mortgage holders was a policy adopted by both countries after 08-09 crisis. Raising interest rates to tame high inflation is also adopted by both countries, though not necessarily at the same time. Therefore, it is a factor that should be paid close attention when trading GBP USD.
final comments
It is important to spend some time learning the history and basics. This time spent will yield dividends when you are trying to predict movement of an asset. Also remember that you are more rational before you place a trade. So, it’s important to set some rules. If you like market conditions and they fit what your rules suggest, go for it. If the conditions for the rules don’t fit what you see in the markets, don’t trade for it’s own sake. You don’t have to trade every day. The point of having rules is to run them to your favour, and not let them run you.
Day trading follows the same rules we use for life. Successful trading is the art of using knowledge and skills at the right time. It is also essential to set some limits once you open a position. For example, you may impose a limit on yourself to not keep a trade open for more than 20 days. Finally get access to good tools that can help you achieve your trading goals. It’s best to try out a lot of things on paper money accounts before risking your capital.
Despite of all the rules, limits and right mindset, random events will happen. So always have a contingency plan. A perfect system or rules don’t exist. And, this is a good thing. Otherwise, someone will work it out and own half of the free world. All algorithms, tools, systems and rules are based on a snapshot of data. So always pay attention to news and data on a given day.
how to apply this to trading
STOKAI provides daily prediction using algorithms based on all factors that impact the price of GBP USD. Then, it evolves this over 10 days in the future. Tutorial and brief user guide is available here – Tutorial
Stokai is a product of Rumble Horse Tech ltd. A company registered in England.