Trading GBPUSD: History, Analysis, Trading Strategy

The GBPUSD currency pair, often referred to as “Cable,” is one of the most widely traded pairs in the Forex market. In this article, you will learn about the history of GBPUSD trading, the factors affecting the pair’s quotes, and strategies for trading GBPUSD.

Brief history of GBPUSD

The trading of the GBPUSD currency pair has a rich history that reflects the economic and political dynamics between the United Kingdom and the United States.

1. Origins

The GBPUSD relationship began in the 19th century when both the British pound (GBP) and the US dollar (USD) were linked to the Gold standard. This made their exchange rate relatively stable. London was the world’s financial capital, and the pound was the dominant global currency.

At that time, the pair coined its nickname “Cable” which originated in the mid-19th century due to the transatlantic telegraph cable laid between the UK and the US in 1866. This cable enabled the first fast communication of currency prices between the two financial centers, London and New York.

2. Interwar period

After World War I, the British economy struggled, leading to the devaluation of the pound in 1931 when the UK abandoned the Gold standard. At the same time, the US economy grew stronger, and the dollar began to emerge as a rival to the pound in global finance. This period saw significant volatility in the GBPUSD exchange rate.

3. Bretton Woods

After World War II, the Bretton Woods Agreement established fixed exchange rates between major currencies, including GBP and USD, with the dollar pegged to gold and other currencies pegged to the dollar.

The British pound was devalued multiple times during this period (notably in 1949 and 1967) as the UK faced economic challenges, reducing its value against the dollar.

4. Present time

The Bretton Woods system collapsed in 1971, leading to the adoption of floating exchange rates. Since then, GBPUSD has been determined by market forces, resulting in greater volatility.

Today, it remains one of the most traded currency pairs in the world, reflecting the ongoing economic ties between the UK and the US.

Which fundamental factors influence the GBPUSD rate?

The GBPUSD exchange rate is influenced by a range of general and specific factors that reflect the economic and political dynamics between the United Kingdom and the United States.

• Interest rates. Decisions by the Federal Reserve (Fed) and the Bank of England (BoE) on interest rates impact the GBPUSD rate. Higher interest rates in the US typically strengthen the USD relative to the GBP, and vice versa.
• Inflation. Differences in inflation rates can influence the exchange rate. Lower inflation in one country can strengthen its currency relative to one with higher inflation.
• GDP. Economic performance indicators such as GDP growth rates affect currency values. Stronger economic data from either country can lead to currency appreciation.
• NFP. This key employment report impacts USD by providing insights into the health of the US labor market. Strong NFP data often boosts the dollar.
• Economic ties. The strength of economic relations and trade agreements between the UK and the US can impact the exchange rate. For example, a trade deal or economic collaboration may boost the pound if it’s seen as beneficial for the UK economy.
• Risk sentiment. GBPUSD is sensitive to global risk sentiment. In times of economic uncertainty or geopolitical risk, investors might favor the USD as a “safe haven,” leading to a stronger dollar.
• Brexit updates. The UK’s decision to leave the EU and subsequent trade and economic negotiations have had a significant impact on GBPUSD. Any news or developments related to Brexit can lead to sharp movements in the exchange rate.
• Political events. Elections or changes in political leadership in either country can affect investor sentiment and the GBPUSD rate. For example, shifts in government policy or leadership can impact market expectations and currency value.

Overall, while general factors like interest rates and economic data are crucial, specific events and conditions unique to the UK and US can create significant movements in the GBPUSD exchange rate.

How to trade GBPUSD: Technical analysis

When trading GBPUSD using technical analysis, several tools and indicators can help you analyze price movements, identify trends, and make informed decisions.

• Moving Averages. This trend indicator averages the closing prices over a specific period.
• Moving Average Convergence Divergence. MACD combines moving averages to identify momentum and trend direction. 
• Relative Strength Index. RSI measures the speed and change of price movements.
• Stochastic Oscillator. This indicator compares a security’s closing price to its price range over a specific period.
• On-Balance Volume. OBV is a cumulative volume indicator that adds volume on up days and subtracts volume on down days.
• Bollinger Bands. This volatility indicator helps identify periods of high or low volatility.

By combining these tools and indicators, traders can develop a robust strategy for trading GBPUSD.

GBPUSD best trading strategy

When trading GBPUSD, a trend-following strategy often proves to be particularly effective due to the pair’s tendency to exhibit strong and sustained directional movements. Let’s break down the best strategy for trading GBPUSD.

GBPUSD indicators

This GBPUSD trend-following strategy requires only three indicators:

• 200-Period MA,
• Bollinger Bands (standard MT5 settings),
• RSI (standard MT5 settings + 50-level added).

By combining these three indicators, this GBPUSD strategy can bring healthy profits to any type of trader, from short-term speculators to long-term investors.

GBP trading: A step-by-step guide

Step 1. Focus on the price in relation to the 200-period MA to determine the prevailing global trend during your analysis. If the price is above the 200MA, prioritize long positions. Conversely, if the price is below the 200MA, consider only short positions. Always trade in the direction of the prevailing trend.

Step 2. Once you’ve determined whether to trade long or short, the next step is to confirm your position. Focus your attention when the price approaches the upper Bollinger Band in a downtrend or the lower Bollinger Band in an uptrend. If the price reaches these areas, watch for a reversal candlestick pattern to confirm your entry. The key is to ensure that the price bounces off the band without showing signs of breaking through it.

Some of the most common candlestick patterns used to identify potential trend reversals include:

• Bearish and Bullish Engulfing;
• Pin-bar (hammer);
• Falling Star (reverse hammer);
• Morning and Evening Star;
• Dark Cloud Cover and Rising Sun.

Step 3. After following the first two steps, use the RSI for one final confirmation. For a long entry, the RSI should be moving below the 50-level but not lower than 30. If the RSI is oversold, avoid opening the position. For a short entry, the RSI should be above the 50-level but not higher than 70. If the RSI is overbought, do not proceed with the trade.

These precautions help filter out trades with a lower probability of success.

Step 4. Your Stop-Loss should be set just above or below the most recent high or low of the candlestick pattern you identified. Place your Take-Profit at the most recent high or low that occurred before the price reached the Bollinger Band you’re using to determine your entry position.

GBPUSD trading: Examples

To demonstrate the effectiveness of this strategy, let’s look at two examples.

The first example demonstrates the application of the strategy for short-term trading. To determine entry points, we used a 15-minute chart.

According to the trading algorithm outlined above, the first step is to determine the general market trend. Currently, the trend is bearish, as the price is trading below the 200MA, indicating that we should only consider short positions.

Next, we wait for a price pullback to the upper Bollinger Band. When this occurs, we observe the formation of an Evening Star candlestick pattern. To confirm our entry, we check the RSI, which is above the 50 level, signaling the trade is valid.

With our analysis complete, we confidently open a short position, setting the Stop-Loss (SL) above the pattern’s swing high and the Take-Profit (TP) at the most recent low. The trade executes profitably.

The next example shows the application of the strategy for long-term trading. To find the best opportunities, we chose the daily chart.

At the beginning of the analyzed period (October 15th, 2020), we established that the price is trading above the 200MA, indicating that we should focus solely on long opportunities.

After 15 days, a reversal candlestick pattern (a Hammer) forms, bouncing off the lower Bollinger Band. We then check the RSI, which is below the 50 level, confirming the validity of the trade. We can confidently open a long position, targeting the most recent price high and placing the Stop-Loss below the Hammer’s wick.

With this expertly curated strategy, you will be able to profit from GBPUSD trading in no time. Always remember to manage your risk and be prepared for market volatility.

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