U.S. dollars / UK pounds, which is usually shown in the acronymic form of GBP/USD or referred to by its nickname the cable, is by far considered the most volatile majors pair and moves, on average, 156 pips per day.
- Historically considered the most volatile currency pair.
- National Interest rates impact the pair's value.
- Monitor fundamental news for movement predictors.
An excellent way to begin trading the GBP/USD is to sign up for a free forex practice account and see if it is a good fit for the trading style you are pursuing. For traders that are especially looking to trade the volatility the U.S. dollars / UK pounds provide should make sure to trade during the peak hours for the pair. This begins at London's open and continues to lunchtime in the UK (around 4.30am EST) and then again in the early US trading session from 7am EST until 10am EST.
As mentioned before, the currency pair is considered to be the most volatile major, and can therefore make huge moves in one single day, which means it provides ample trading opportunities for many different time frames.
One of the big fundamental factors that influence the movement in this pair is interest rates. Currently, the issues in the housing market in the United States have caused the Fed Chairman Ben Bernanke to lower interest rates by 50 basis points to 4.75%, which has caused an even greater weakening in U.S. dollars. UK pounds have in turn strengthened even more than before as the interest rate differential of 1% is in favor of the GBP at 5.75%.
Therefore, traders who are long UK pounds will be able to earn the interest rate differential every day that their position is open. This is something any trader can try on a free practice trading account. For every day that a trader has a long GBP/USD position past 5pm EST (the official start of the new trading day), rollover interest will be applied to that position. Overall, if the trader were to keep the trade open for 1 year, the trader would earn 1% interest on their position. This of course does not take into account any potential gain or loss on the position based on currency movement throughout that year.
Dollar and Pound
When trading the dollar-pound it is also important to watch for some specific news events that could potentially trigger a move in the market. As mentioned, interest rates play an important role in the strength of one currency over the other. Specifically, this means that any statements made by the U.S. Federal Reserve Bank Chairman Ben Bernanke and the Bank of Englands Governor Mervyn King should be closely followed and scrutinized.
Another very important factor for the British pound is the UK housing market. US economic data is also very important because of the recent credit crisis, which can potentially lead to more negative effects for the dollar. The housing bubble in the UK is what has led to a series of interest rate hikes and any signs that it will either continue or burst will have an effect.
Some examples of fundamental news that would be important to this pair are: Bank of England Meeting Minutes, UK Housing Prices, and UK Unemployment. For the dollar, the data to closely watch would be: FOMC Rate Decisions and Meeting Minutes, Non Farm Payrolls, US Trade Balance, TIC Data, and Retail Sales. Overall, as with any other currency pair, even though the GBP/USD allows for many trading time frames and styles, the fundamentals are still very important. Even for intraday traders, the possible avoidance of news events can be vital. When comparing the pair it is essentially important to buy the strongest and sell the weakest. The decision of whether the dollar or pound is the stronger of the two lies in the results of fundamental news and specifically the ones described above. After a trader is made aware of the current standing of the fundamentals, then the analysis for their specific trading strategy can be performed and potential trades can be placed.
