The GBP/USD pair is the third most frequently traded currency pair in forex, nicknamed Cable. It’s one of the oldest currency pairs, representing two economies - the United Kingdom and the United States. The value of the GBP/USD depends greatly upon the relative economic strength of each nation.The currency pair indicates how many U.S. dollars (the quote currency) are needed to purchase one Great Britain Pound (the base currency). For example, if the pair is trading at 1.30, it means it takes 1.30 U.S. dollars to buy 1 British pound. The British pound/U.S. dollar pair is one of the most liquid currency trades in the forex space. The tight bid-ask spreads, volume, and volatility produce excellent opportunities for substantial day-trading profits.

Breaking Down ‘GBP/USD’

The GBP/USD is one of the most liquid, cash-rich currency pairs in the world. GBP/USD is the third most traded major currency pair, consisting of about 9.3% of total daily forex trading volume. As two of the most advanced markets in the world, GBP/USD uses an abundance of resources for obtaining price information and data. In 2019, it was determined that over 41% of the volume traded in the FX markets goes through London.GBP/USD rates can shift exceptionally fast. While this is excellent for active, decisive traders, it also implies that you can lose money pronto. To counter this, you need to be disciplined, employing effective risk and money management tactics.

What Determines the GBP/USD Exchange Rate?

There are two main factors that determine the GBP/USD exchange rate: Bank of England and U.S. Federal Reserve Monetary Policy: The Bank of England and Federal Reserve control the supply of money in the market to keep the economy on track. A dovish policy, also known as expansionary policy, weakens the currency as the monetary supply increases. In contrast, a hawkish monetary policy (contractionary policy) strengthens the currency as central banks increase interest rates, contracting the monetary supply.

Economic Events:

Any movement in the U.S. and UK economic events determines the exchange rates. Top-of-the-line economic events include:Better than forecast data increases the demand for the related currency and impacts the value of either sterling or the U.S. Dollar, causing fluctuations in the GBP/USD exchange rate as investors rush in to buy either currency.

Let’s take a closer look at some of these events.

Gross Domestic Product

The Gross Domestic Product (GDP) is a central measure of economic growth in the region and is the forerunner of U.S. and UK economic prosperity.

Employment Change

The U.S. dollar and British pound are both sensitive to changes in employment, as both typically like to maintain low levels of unemployment. High unemployment typically indicates weakness in the economy and drives the respective currency down.

Consumer Price Index

Since one of the main goals of the BoE is to maintain price stability, they keep an eye on inflation indicators such as the CPI. If the annual CPI deviates from the central bank target of 2%, the BoE could use its monetary policy tools to keep inflation in check.

Industrial Output data

Although the UK has a declining manufacturing and industrial sector, the U.S. industrial sector plays an important role in its economy, with manufacturing accounting for nearly 11% of GDP. Economic releases that show increased demand or a slowdown in production can strengthen or weaken the dollar, causing a fluctuation in GBP/USD.

Other GBP/USD Price Factors

These aren’t the only factors, however. There are others, such as:

Risk sentiment

If the overall sentiment in the UK is ‘risk-off’ while the US remains ‘risk-on’, generally speaking, you’ll see the dollar appreciate against the pound as investors look to buy up dollars, speculating that it will perform better than the pound.

Geopolitics

This can be a tricky one, as the US is the world’s reserve currency. This means that investors usually flock to the dollar in times of fear, but it’s not always that simple. However, if the UK announced its participation in a war, for instance, it’s likely that the pound would fall against the dollar.

Currency Correlations

What may not be evident on your GBP/USD real-time chart is the influence of forex correlations. You may know that forex currencies are priced and traded in pairs and that no single pair is totally independent of other pairs.For instance, if you are trading the British pound versus the Japanese yen (GBP/JPY), and the pair soars, you’ll likely see a boost in GBP/USD as overall demand for sterling increases.

GBP/USD Recent Events

Rate Hikes

With inflation rising, the BoE and Fed are keen to push inflation back down to their targets of 2%. As a knock-on effect of the pandemic, both central banks have been steadily raising interest rates to calm consumer spending and lending. Everything else being equal, higher interest rates cause a currency to get stronger as foreign investment floods in to realize interest rates higher than their native banks.

Rising Inflation

In June 2022, CPI saw a 9.1% and 9.3% rise year-on-year in the U.S. and UK, respectively. High inflation devalues currency, prompting central banks to raise interest rates. It also gives consumers and businesses less spending power, meaning that less growth is made and GDP contracts; telltale signs of an impending recession if central banks don’t take significant action.In the US, inflation has primarily been driven by a huge boost to the monetary supply; in the UK, restrictions on gas supply due to the conflict in Ukraine have caused energy prices to soar, having a massive impact on inflation.

Recession Fears

Talks of recession have been on the cards for both the U.S. and UK recently. In July 2022, the U.S. saw two consecutive falls in GDP in the first two quarters, a widely-accepted hallmark of a technical recession.Meanwhile, in August 2022, the BoE predicted a deep recession in the UK, starting in the last quarter of 2022 and lasting 15 months. Both will have adverse effects on the currencies. As the UK looks to perform worse than the US, which is still showing signs of a strong labor market, this could cause GBP/USD to fall as the pound weakens and the dollar remains strong.

Coronavirus

One of the root causes of the recent rate hikes, high inflation, and impending recession was the Coronavirus pandemic. As millions stayed home, central banks pumped billions into the economy, devaluing their currencies while increasing the flow of money to invite strong spending. Combined with supply chain issues and record levels of new job openings as a result of reopening economies, inflation has soared to heights not seen in decades.

GBP/USD Specifications

The GBP/USD is traded in amounts denominated in U.S. dollars. Standard lot Size: 100,000 GBPMini lot size: 10,000 GBPOne pip in decimals 0.0001Pip Value: $10

Formula:

Pip Value Dollar = Pip in decimal places * Trade Size Pip Value in Pound = (Pip in decimal places * Trade Size) / Market Price