Characteristics of the currency pair GBP/USD
What is a currency pair?
A currency pair is a financial instrument that allows trading in the Forex markets. Its essence is the ratio of the value of two monetary units of different countries. When buying one currency from a pair, the other is automatically sold. Thus, the two currencies specified in the pair form an exchange rate.
The currency listed first in the pair is called the base currency (quote base), and trades are executed with it. The second is the quoted currency (the quote currency), which determines the value of the base currency for which it is traded. Often the base currency is compared to a commodity and the quoted currency to its price. So, for example, in a EURUSD pair, the Euro (EUR) would be the base currency, and USD would act as a quote currency.
A currency pair is a ratio between two world currencies that determine the exchange rate traded on the foreign exchange market. The currency pair is consistently named in the following order: the base currency is always listed first, followed by the quoted currency.
All world currencies are denoted by a common three-character abbreviation that designates the name of the state and currency unit: the USA - USD, CAD. Currency pairs are represented either by a single abbreviation or with a slash.
Currency pairs are divided into three groups according to their major characteristics:
- Major (major).
- Non-major (minor).
- Exotic (exotic).
1. Major currency pair is the most popular instrument in the whole financial market. Major currency pairs always include the US dollar; they are the most popular on the world currency market and have high liquidity. Major currency pairs include seven traditional pairs; trading operations in this group account for 70% of all Forex currency trading turnover.
Each currency pair in this group is an alliance of the US dollar with quoted currencies of other countries. The major currencies on the global market are Euro, US Dollar, British Pound Sterling, Swiss Franc, Canadian Dollar, Australian Dollar and Japanese Yen.
The following currency duos are in demand on the market:
- EURUSD (Euro/US Dollar) has a high daily turnover.
- GBPUSD is known on the exchange as 'the pound'.
- USDCHF has a high inverse correlation coefficient to the EUR/USD pair.
- USDCAD is one of the most popular pairs in the American market.
- USDJPY is a major currency pair in Asia.
- USDAUD is traditionally in demand.
USD is the primary currency in forex trading. Of course, non-dollar currency pairs are also actively traded, but the more robust demand comes from USD pairs.
- First of all, it is because major currency pairs have high volatility, which significantly impacts trading.
- Secondly, it is profitable to work with the instruments mentioned above, as they have a relatively low spread. Major currency duos are especially relevant for short term trading.
- Thirdly, most of the forecasts, analyses are made based on the currency pairs of the leading group.
The EUR/USD (Euro/USD) is the world's leading currency pair, actively used in the trading floors of all countries except Asia, where interest in the couple is slightly lower than in the United States and European markets.
2. The group of minor currency duos consists of relatively less popular instruments. This group most often includes currencies of local importance, the rapid turnover of which is ensured primarily through the world's major currencies: the dollar and the euro.
3. Exotic duos involve a combination of the main currencies (US dollar and euro) and the currencies of developing countries (South Africa, Brazil, India) or economically developed small countries (Norway, Czech Republic). These pairs are not traded as frequently as the leading and non-main group currency duos, so relatively high spreads characterise this group.
Trading sessions are commonly referred to as the time range of the world's trading venues. That happens because their location in different geographic zones predetermines the trading day's other start and end times.
Initially, the term "trading session" was used exclusively for stock and commodity markets. However, it has also come to be used in the forex market.
Schedule of trading sessions
When trading, it is necessary to consider the time zones. Without it, profitable trading is impossible. Therefore, all speculators are guided by Greenwich Mean Time.
It is through this area of London that the zero meridian passes. Therefore, the common abbreviation of GMT (Greenwich Mean Time) means "Greenwich Mean Time".
The other time zones are relative to Greenwich, with those further west being subtracted from GMT and those further east being added to it.
Depending on the geographical location of the world stock exchanges, there are three Forex trading sessions:
There are no open sessions on weekends. Trading begins when the Sydney session opens at the beginning of the week and ends when the New York session closes. However, the trader's position will depend on what time and what day it is at that moment. For example, if the trader is trading from Japan, the trading week starts on Monday morning. However, if he is in the UK, it will be Sunday evening.
1. Asian session.
The Asian session starts at 22:00 GMT when Sydney opens. However, because only Sydney itself trades at that time, trading volumes are pretty low, and thus price movements are minimal compared to the rest of the session.
At 00:00 GMT, Tokyo opens and trading volume increases. Australia and Japan are small markets compared to Europe and the United States, so small price movements. Spreads on the major pairs are usually a little higher at this time, and liquidity is not as high as it would be during the European and American sessions.
During the Asian session, the Australian, New Zealand dollar and Japanese yen are the most traded, as these are the home currencies of the then open markets. Therefore, during this session, the most traded currency pairs are AUD/USD, AUD/JPY, AUD/NZD, USD/JPY, NZD/JPY and NZD/ USD.
2. European session.
At 8:00 GMT, the London session opens, and Tokyo remains in session for the last hour.
During this time, a large number of traders are engaged in the market. As a result, there are more price manoeuvres than in the Asian session, as day traders close positions in Asia, while other day traders open positions in Europe.
No currency pair deviates from standard behaviour during the European session, meaning all currency pairs can be traded. The trading volume is significantly higher during these sessions, so spreads are usually lower.
Liquidity is also higher in London than in any other session, as the London market takes up almost 38% of the total trading volume - more than New York (17%) and Japan (6%) combined. Therefore, trading during the open London session is also preferable for the novice trader, as it is a highly liquid market.
3. American session.
At 13:00 GMT, the New York session opens simultaneously with the ongoing London session. With simultaneous participation of traders of both sessions, volume and volatility usually increase.
At 17:00 GMT, the London session closes, and only the New York session remains active until Asia reopens.
Only the New York session is open, and while trading volume is still above the Asian session, it declines during the European traders' exits. During the American session, there are no specific currency pairs that should or should not be traded.
Trading time frames
The term 'timeframe' is among the first things that beginners encounter when they come to make money in the financial markets and open a trading terminal. A timeframe is when a single Japanese candle or bar is formed on a chart.
Different trading terminals offer a variety of timeframes, ranging from the short term to the long term: 1 minute (M1), 5 minutes (M5), 15 minutes (M15), 30 minutes (M30), 1 hour (H1), 4 hours (H4), day (Daily), week (Weekly) and month (Month).
These can be changed by finding the required designation on the trading terminal toolbar.
Which time frame is best for trading?
This is a very subjective question, and the answer depends on the trading strategy you use. For scalping, which involves opening a large number of trades and making small profits on each of them, you should choose short term timeframes, from 1 minute to 15 minutes. For medium-term trading, we use 30-minute, hourly and four-hour timeframes.
Long term time frames, daily, weekly and monthly, are used for trades opened for a more extended period, from a quarter to a year. Meanwhile, for a more accurate and high-quality technical analysis, the trader needs to use several timeframes as a complex.
One of the most thoughtful and comprehensive technical analyses that provide a complete picture of the market situation at the current moment in time is the complex technical analysis that involves assessing the price situation on the timeframes from the most senior to the working (junior).
To carry out technical analysis, you should open the most extended timeframe and use it to analyse the chart according to your trading strategy. You can see the historical price movement, trends, and critical technical levels on the monthly chart.
It is worth noting that support and resistance lines and horizontal levels drawn on this timeframe are the strongest and will stop price in the first place.
We should indicate trend channel levels, highs and lows of price movements, trend reversal points, and candlestick shadows on long term time frames. There was a solid directional price movement. These will be the most critical technical levels.
After analysing the monthly chart, we should proceed to the weekly chart and add the required levels visibly when the interval is reduced. Then the primary analysis is performed on the daily timeframe, and then we complete the evaluation of the technical picture by switching to the working time frame.
Traders who trade within the day and week on timeframes M30, H1 and H4 will also need those daily charts. Why? Because within a trading day, banks, market makers and significant players operate, setting essential price points and levels from which intraday trades will be derived.
Trading in the financial markets on the smaller time frames is different in that they are suitable for short term positions and provide entry points for short term trades, which give small profits.
However, short term timeframes are good for finding the jewellers and most accurate entry point into a trade for which an entry point was found on a long term one. This method allows you to minimise your risks, increase your profits, determine the level of market noise and set a stop loss to avoid these movements.
Features of the currency pair GBP/USD
GBP/USD is one of the most traded currency pairs on the Forex market. Moreover, it is one of the top 4 most liquid trading instruments. As a result, its share of turnover on the market is around 15%.
General characteristics of the currency pair GBP/USD
Quotes of the pair show how many US dollars it will take to buy one British pound sterling.
GBPUSD rate has emotional dynamics, often demonstrating sharp jumps. As a result, the pair's volatility is high; by comparison, it is twice as high as the EUR/USD fluctuation range.
In a day, the price of GBPUSD can go up by 150-200 pips. Such a movement is highly dynamic and carries certain risks for traders.
Experts recommend trading with this instrument with caution. When calculating the stop-loss levels for your positions, you should consider the high volatility of the pair and focus on the highs and lows, which can be predicted at the selected interval of the price chart.
Factors affecting the GBP/USD exchange rate
The value of GBP/USD is influenced by economic and political news, both within the UK and the EU.
Statement of the Monetary Policy Committee of the Bank of England (MPC) is significant for the GBP quotes. The MPC sets official interest rates that affect the national currency rate. If the interest rate in the UK is higher than in another country, the GBP will go up against the currency of that country. Conversely, if the rate is lower, it may fall.
The exchange rate is also affected by inflation data published by the Bank of England in its quarterly Inflation Report. This report details the growth potential of the economy and the inflation outlook for the next two years.
Another essential document is the Quarterly Bulletin. It records the results of the monetary policy chosen by the authorities and describes the country's economic outlook.
The exchange rate is also influenced by:
- Labour market data;
- Balance of payments and trade data;
- The situation on the commodity markets;
- United States economic reports;
- The UK and world political news.
Although the United Kingdom has finally left the European Union after Brexit, the impact of European news on the pound exchange rate persists. As a result, GBP/USD still tends to correlate with EUR/USD.
How to start trade GBP/USD in New Zealand?
If you want to try trading GBPUSD, choose a broker and register online. You will be asked for your information when you register. This is so that you can be identified.
Practice and try your hand at trading. Learn all the ins and outs of trading without the risk of losing your money. That is a great chance to learn the basics of trading. Experiment, learn and try trading.
Feel like it's time for some real action? Then open a real account with a minimum deposit. Then you'll have access to all the trading platform's features.
May success be our companion!