The quotation GBP/USD stands for British Pound/U.S. Dollar and articulates the number of USD required for obtaining one GBP. In the symbol above, the GBP stands for the base currency while the USD is the counter currency.
GBP/USD currency pair is one of the world’s most heavily traded pairs, which absorbs over 12 per cent of the total market share almost every day. Ranking fourth in the list of the most oft-traded pairs, the GBP/USD is particularly important when trading with Great Britain and other European countries.
Like all other currency pairs, the GBP/USD pair undergoes abrupt and evident changes on a daily basis. However, very similar to the EUR/USD pair, this currency pair is also unpredictable and exhibits extremely high volatility, making it hard for many traders to predict its next trend.
Great Britain and the United States together form one of the biggest giants in the world market, both of them being home to the most of the world’s most important and largest multinational corporations. The two also tend to have exemplary economic stability and progress, thus making the GBP/USD currency pair crucial in the forex market.
General Facts and Importance
With a daily turnover of the pair being 12 per cent, the GBP/USD duo serves as an important pair when it comes to transactions and reserves. Not only this, the pair is said to have the highest liquidity in the market. Consequently, the pair can be one of the best choices for traders who have just stepped in the world of forex and need to make sure that they get a start that is safe.
The exchange of GBP/USD in the world market is continuous and rarely ever ceases, that further adds to its volatility and liquidity. Besides, there is always a rumour and a potential chance of the United Kingdom amalgamating in the Eurozone. Such possibilities give birth to political debates, which serve to affect the strength of the GBP. If the debates go against the proposal of joining the EU, the value of GBP generally augments. The pound weakens when the arguments favour the merging of UK in the Eurozone.
The rapid changes and increasing volume of trade leaves the traders with a very narrow or no chance of arbitrage at all. Even the bid-ask spreads are bleak. Despite these short comings, the pair is appreciated by the traders for its high volatility and liquidity.
UK was the world’s largest economy and the pound served as the unofficial currency in which reserves could be made. Even today, the UK is pivotal to the direction of the world trade, thus, making the GBP an important player in the forex market. The US, on the other hand, is the world’s super power and also has a very stable economy. Almost all international reserves are made in dollars and commodities are sold at prices that are fixed in USD. The importance of the pair cannot be undermined.
Factors Affecting the Pair
Nothing affects the strength of one currency relative to the other better than the interest rates. The country with the higher interest rate would have the stronger currency. The conditions of the local markets and political situations in either of the two countries will affect the trade and value of the pair in the long-run.
The weakness of the GBP against the USD is often attributed to the strict regulations implemented by the British government. The labour laws in the UK also affect the strength of the GBP against the USD.
Taking Advantage of News Trading to Make Money While Trading
Keeping yourself updated with the latest trends in the market and the predictions made by economic pundits is essential if you wish to succeed as a trader in the forex world. Missing the news or the early morning economic indicator can have long-lasting adverse effects. Before the market starts and after it stops operating, filling yourself with information on what’s new is going to prepare you for the best and the worst.