Forex Trading: The GBP/USD Currency Pair

The GBP/USD is known as the “Pound dollar” by forex traders and is one of the majors. Both the US dollar (USD) and the British Pound (GBP) are popular currencies; having average daily over-the-counter (OTC) turnovers of US$4,438 billion and US$649 billion respectively for 2016. Of the two currencies, the USD is the more widely traded, accounting for as much as 88% of the OTC forex market (2016). It is second in trading volume among the major pairs to the EUR/USD.

The GBP accounted for 13% of this market during the same period. Considerable levels of trading between these two economies gives rise to the need to hedge against foreign exchange risks. The liquidity of the USD, and to a lesser extent, the GBP, also makes the pair an attractive trading pair for retail forex traders. The volatility of the currency pair over the last 10 weeks was approximately 1.01%, with the pair moving by 125.84 pips during the period.

The GBP/USD closed trading at 1.2291 on Friday March 3rd, 2017 (Bloomberg), gaining 0.20% over the previous close of 1.2267.

Fundamental Influences on the GBP/USD Currency Pair

As with most currency pairs, the economies of both the United States and Great Britain, have a significant, influence on the rate of exchange. With the economy of the United States expected to undergo major changes in 2017 and beyond with the new Trump administration, the pair is likewise expected to adjust in response to the prevailing economic conditions.

The interest rate policies of the US Federal government are also expected to impact the currency pair. Similarly, Brexit is still expected to affect the exchange rate between the pound and the dollar during 2017.

Major political events are known to impact currency rates of exchange. For example, during the week following the inauguration of President Trump in January 2017, the GBP/USD rate fell sharply following great uncertainty about the US economy. As the pound strengthened, the dollar dropped sharply.

Three factors that could greatly influence the GBP/USD currency pair in 2017 include

The US Federal government’s interest rate policies, the Brexit decision, and the performance of the US economy under the new leadership of President Donald Trump.

The US Federal government has hinted at the possibility of three interest rate hikes during 2017. Increased US interest rates will favour investment in that country which will trigger increased demand for the US dollar, all other things remaining equal. President Trumps’ immigration and trade policies are likely to trigger inflation and growth in wages.

More clarity on the fundamental impacts on the currency pair will be gained as the year progresses.