Trading the GBP/USD Currency Pair – A Beginner’s Guide
The British pound/U.S. dollar currency pair denotes the exchange rate between the British pound and the U.S. dollar. The pair expresses the relationship as the number of dollars needed to buy one pound.
For example, if the GBP/USD exchange rate is 1.30000, it means you need $1.30 to buy one pound. In this pair, the pound is the base currency, and the U.S. dollar is the quote currency.
With an impressive daily turnover of about $470 billion, the [[GBP/USD]] is the third most liquid currency pair in the world. The total daily turnover in the forex market is approximately $5.1 trillion, which means the GBP/USD represents about 9.2 percent of this colossal amount.
A 20-pound note with coins
History of the Pound
The pound is a much older currency than the U.S. dollar, of course. It’s been around for more than 1,200 years. In the 8th century, in the Anglo-Saxon kingdoms, 240 pennies made up one pound.
The United States Dollar
Although it’s not nearly as old as the pound, the U.S. dollar has been the United States’ standard monetary unit for more than 200 years.
The U.S. dollar is the most traded currency on this planet. It is also the world’s number one reserve currency.
How the GBP/USD is Traded
Although there are other ways to trade this currency pair, we’ll focus only on how it’s done with retail forex trading.
Pip Value of the GBP/USD
A pip is an incremental price change, with a particular value depending on the market in the subject. It’s a standard unit for gauging how much an exchange rate has fluctuated in value. Initially, a pip is the smallest increment in which an FX price would run.
To establish the pip value of the GBP/USD, we first need to consider what a pip is. If the GBP/USD is trading at 1.30010 and the exchange rate moves to 1.30020, it has moved one pip higher. The fourth digit after the decimal point is called a pip.
To calculate the pip value of the GBP/USD, we’ll use a 1K lot as an example. On the GBP/USD, one pip is 0.0001, or 1/10000 of one U.S. dollar. Multiply this by 1000 and you get $0.10. This is the pip value of a micro lot (1k lot) of the GBP/USD.
GBP/USD Lot Size
A standard lot in forex is 100,000 of a particular currency pair. However, most retail forex brokers offer lot sizes as small as 0.01 lots, which is 1000 of the particular currency pair. This is called a micro lot. Some trading platforms denote this as a 1K lot size. Others refer to a 1K lot as one unit.
For a really small investor, a 1K lot sounds like a very big trade size. After all, how would someone with a $500 account be able to open a 1000 pound position?
Well, the great thing about trading forex is that retail brokers allow you to trade with leverage. The leverage offered by retail forex brokers generally varies between 1:100 and 1:1000. Some brokers offer ridiculously high leverage of 1:2000, 1:3000, and even 1:5000.
Of course, some countries regulate the amount of leverage you can use as a retail forex trader. For example, the United States allows a maximum leverage of 1:50.
Let’s use 1:100 leverage as an example. If you have a $500 account and you want to open a 1K trade on the GBP/USD, you will need less than $13.00 to open this position.
This is based on an exchange rate of 1.29500 dollars per 1 pound. Without using leverage, this would not be possible because a 1K lot of the GBP/USD is worth $1295.
Profit and Loss Calculation
Are you doing your calculations correctly?
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Let’s calculate how much money you’d make if you traded a GBP/USD signal with 12 micro lots and hit a profit target of 276 pips. 12 micro lots, is 12,000 of the GBP/USD currency pair. If we multiply this by $0.0276, which is 276 pips, we get $331.20. (12,000X$0.0276=$331.20).
If that sounds a little bit complicated, you can just multiply the pip value of a 1K lot, which is $0.10, by the number of micro lots traded, and multiply this number by the number of pips you made: $0.10 pip value X 12 micro lots X 276 pips = $331.20.
Instruments Correlated to the GBP/USD
Other pound pairs are generally correlated to the GBP/USD. Some of the pairs with the highest correlation to the GBP/USD include: EUR/GBP: -0.89, GBP/AUD: 0.96, GBP/CAD: 0.96, GBP/CHF: 0.95, GBP/NZD: 0.94, and GBP/SGD: 0.91.
Correlated Equity Indices
The only stock index with a notable correlation to the GBP/USD is the UK100 with an inverse one-year correlation of -0.85. This means that the UK100 tends to decline when the GBP/USD rises, and vice versa.
Major Economic Events that Impact the GBP/USD
Of the many economic events that influence the GBP/USD, there are a few that can cause substantial volatility in this exchange rate:
1. Monetary Policy – Actions and Comments by Central Banks
Monetary policy is certainly one of the most important drivers of the GBP/USD. The Federal Reserve of the United States and the Bank of England are in charge of their countries’ monetary policies.
When the FED and the BOE comment or take action in regards to interest rates, quantitative easing, inflation, and economic growth forecasts, it often causes violent moves in the GBP/USD exchange rate.
Mark Carney, governor of the Bank of England (BOE)
2. Economic Indicators
Economic indicators are used to analyze how well a country’s economy is performing, and to predict future economic growth. There are three main categories of economic indicators; leading, lagging, and coincident indicators.
Indicators like GDP numbers (gross domestic product), CPI numbers (consumer price index), interest rate decisions, the unemployment rate, wage growth, industrial production, and retail sales numbers, are released regularly in both the U.S. and the United Kingdom.
Although these aren’t the only important economic indicators, they have the greatest potential to move the GBP/USD, especially interest rate decisions, GDP and CPI numbers, and labor market data (like the U.S. nonfarm payrolls numbers, unemployment rate, etc.).
Economic news out of both the United Kingdom and the United States can move the GBP/USD exchange rate considerably.
The GBP/USD often makes powerful moves in short periods of time. This is important to keep this in mind when you trade this pair.
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