This is the right place if you’re looking for information on trading GBP/USD! The United Kingdom has the fifth-largest economy in the world, while the United States has the largest. Forex traders need to trade GBP/USD because of these dynamics.
Now could also be one of the best times in history to learn how to trade the GBP vs USD exchange rate since the Bank of England will begin to increase interest rates in 2022 and the UK government will cut taxes. This article aims to help you understand what causes volatility in GBP/USD so that you can start trading immediately!
How does GBP/USD trading work?
In GBPUSD trading, the British pound is referred to as the base currency, while the US dollar refers to as the term currency. One British pound is equal to US dollars. This appears in the currency pair quote.
As an example, consider the GBP/USD exchange rate of 1.2500. A quote shows how many units of the terms currency are required to buy one unit of the base currency when buying GBPUSD. For example, 1.25 USD is necessary to buy 1 GBP in the above example.
You get a quote when you sell GBPUSD, which shows how many units of the terms currency you get. As you can see, when you sell 1 GBP, you will receive 1.25 USD. How does this affect Forex traders?
Your Forex broker will quote two prices for the GBP/USD if you trade Forex and the British pound to the US dollar exchange rate. There are bid and ask prices for the GBP/USD quote above, and these levels will constantly fluctuate. The GBP/USD quotation uses the pip as a measurement of 0.0001 of the quoted price. For example, a one-pip move in the bid price is when it moves from 1.27366 to 1.27376.
What creates volatility in the GBP/USD?
Since the United Kingdom is an important trading nation, many factors impact the GBP/USD live rate. Several factors influence the British pound, including international demand, central bank policy, and political tensions. Keeping an eye on the economy requires us to consider a few key economic indicators:
The UK and US economy
An economy with a strong and growing economy will be in greater demand for a currency. The GBP/USD exchange rate could rise when the UK economy is doing well, and the US economy is doing poorly.
Bank of England (BoE) policy
Monthly, the Bank of England releases its Monetary Policy Summary report detailing the reasons behind its policy decisions to either cut, increase, or hold interest rates. In a normal economic environment, currency values fall when interest rates appear to be cut, while they rise when interest rates rise.
Politics and government
We saw how Brexit caused the British pound to lose much value after the UK voted to leave the EU, leading to a massive decline in the British pound to the US dollar exchange rate. A change in political parties and government elections can also significantly affect the GBP/USD rate.
Liz Truss, the Tory Party-elected prime minister, and her Chancellor, Kwasi Karteng, Tory Party-elected chancellor, posted a mini-budget announcement in September 2022 that plunged the British pound to 37-year lows against the US dollar.
Economic data
Despite the above events affecting long-term market trends, smaller economic data announcements directly affect the pound versus USD on a short-term basis. News about GBP USD includes retail sales, inflation, employment figures, and other economic announcements.
Bottom line
Undoubtedly, the GBP/USD currency pair is the world’s third most traded currency pair. In both countries, the exchange rate is affected by economic indicators and the actions taken by the central banks to boost or devalue their currencies. Though it has consistently weakened since World War II, the British pound is historically stronger than the USD. When the Great Recession hit, investors fled to the dollar, resulting in a near-third loss of the pound’s value. Traders can trade the GBP/USD pair through any forex broker and other currencies.
