Forex Pairs: USD/GBP Trading Background & Indicators

The official name for the British pound is pound sterling, and when trading against the US dollar is often referred to as cable, a historical reference to the cable which was originally used to connect the US and UK markets, with a physical cable running across the Atlantic, which synchronised the currency quotes. The usd gbp forex pair is the fourth most widely traded in the currency markets, and at the time of writing is the third largest reserve currency, behind the US dollar and the euro. However, with the ongoing drama currently unfolding in Europe and with talk of the long term demise of the euro, this could change in the future. In reality this is unlikely due to the time, effort, and money, that the Eurozone has poured into the Euro project, and as a result pound sterling is likely to remain in third place for some time to come. As one of the major currency pairs (of which there are six others ), the GBP USD is usually quoted with pound sterling as the base currency, although in the futures markets the pair are generally quoted in reverse as the USD GBP, as most currency futures contracts are based against the US dollar.

In terms of the economy, the UK ranks seventh in the world, and is the fifth largest net importer of goods, with the US, Germany and France the biggest exporters to the UK. Whilst most of Europe has now adopted the euro, the UK remains firmly linked to the pound, a position which is becoming increasingly secure as the euro comes under further pressure with the prospect of a default from an EU member state. Whilst at present this seems likely to be Greece, other candidates include Spain, Italy and Portugal. In reality, none of these countries will be allowed to default, but with the markets nervous the sell off in the euro continues unabated. All of this is good news for the euro sceptics who maintain that an independent currency is key for the longer economic survival and financial independence of the UK as a whole, and whilst Sterling has had problems of its own, it is generally considered to be less of a ‘basket case’ by investors than the euro.

In the last 25 years the UK economy has changed dramatically, as both manufacturing and heavy industry have declined to be replaced with a services orientated market, which is now responsible for creating almost 80% of the jobs, primarily in financial services, banking and business services. The agricultural industry is one of the most efficient in Europe and as such supplies over 62% of the local demand.

Monetary policy is set by the Bank of England who were given financial independence from the UK Government in 1999, with inflation targets being set by the Government and then subsequently managed by the Bank, using the blunt instrument of interest rates. In the last two years, quantitative easing has been the latest method adopted by central banks around the world, to manage monetary policy in an attempt to ease lending and prevent a further slump in confidence, as the retail banks continue to hold on to their cash reserves. Interest rates in the UK have been on hold for the last 18 months at a record low of 0.5%, where they seem likely to remain for some time.

Forex Trading Indicators

There are many forex trading indicators and charts provided by brokers such as eToro which will move the usd gbp currency pair, and you can find all the latest news for the pair by checking on the economic calendar for today, which will highlight the latest releases and their likely impact on the forex markets, and the usd gbp in particular. The following are the major releases which will create extreme volatility on release.

• Interest rates – with rates at their lowest for decades, there is little room for further reduction from the current 0.5%, and these are only likley to start increasing once the prospect of a double dip recession has receded, and the austerity measures begin to take effect. Changes in interest rates will make one currency more attractive when compared to another, causing investors to buy or sell the currency accordingly.

• GDP – the Gross Domestic Product is a classic lagging indicator and one of the ‘big numbers’ that will move the market, as it provides a view of the UK economy and whether this is growing, or shrinking. The data is released quarterly, and in general a positive release will prompt a bullish move and subsequent buying in the currency.

• CPI – the consumer price index is another of the big economic indicators which will make the forex markets move dramatically on release, as it measures the change in the cost of retail goods and services, and is generally measured using a basket of products. The CPI figures are released in two parts with the second, referred to as Core CPI, providing a more accurate reflection of inflation. The figures are released monthly by the Office for National Statistics..

• Trade balance – this figures simply illustrates whether the country is exporting more than it is importing, which in this case would be a positive trade balance, whilst the reverse of this indicates a negative balance. The second of these implies that currency is flowing out of the country which could lead to a weakening in the currency as a result.

All of the above indicators are covered in more detail in the economic indicators section of the site, and below is a forex trading chart with the latest live prices for the USD GBP forex pair.