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The sterling/dollar currency pair is one of the oldest still in use, as well as being one of the most widely traded. The pair’s long history is evident in the slang term that’s used to describe it – ‘trading the cable’, which dates back to the 1800s. At that time, the exchange rate between the two currencies was communicated via a cable running under the Atlantic.
Operating under the code of ‘GBP/USD’, this currency pair explains to investors how many dollars are required to buy one British pound. Currency traders closely monitor economic and political events on both sides of the Atlantic to predict where the pair’s exchange rate is likely to end up next. If they believe the pound is about to strengthen against the dollar, they can try to profit by buying the GBP/USD pair. On the other hand, if they forecast a weakening in the pound, they can sell the pair.
Despite the enduring popularity of this market, trading the GBP/USD currency pair can often prove volatile for investors. As a result, it may be more suited to experienced currency traders who already know their way around the forex sector.
However, those investors who do feel up for the challenge have three main options open to them when trading sterling and the dollar. They are as follows:
Buying and selling the two currencies directly on the forex market. Individuals can exchange one currency for the other by opening a trading account with a retail forex broker. The rise of online brokers has made this much easier than in the past.
Using derivatives to speculate on future price movements. Futures and options allow investors to speculate on the direction that the GBP/USD currency pair is likely to take. Contracts for difference (CFDs) can also be used to trade currencies. By entering into CFDs, people can invest in the possibility of a currency’s price moving up or down, instead of having to buy it outright. CFD investments are available through eToro.
Making use of specialist exchange-traded funds (ETFs). The past few years have seen the emergence of ETFs that specifically track the movements of a particular currency. They ultimately allow people to gain some indirect exposure to the forex market. Investors can trade these ETFs in an attempt to profit from fluctuations between different currencies.
A wide range of issues can cause the exchange rate between the pound and the dollar to fluctuate. They include:
Key economic data releases. Official gross domestic product (GDP) statistics, retail sales figures and purchasing managers’ indices can all help investors to gauge the relative economic performances of the UK and US. Wide differences between these figures might cause the pound to rise or fall against the dollar.
Interest rate movements. The monetary policy stances adopted by the Bank of England and the US Federal Reserve can also prove influential. For example, an upward movement in a country’s official interest rates traditionally fuels a rise in its currency, thanks to an increase in foreign investment.
Inflation trends. Particularly high levels of inflation in the UK could cause the value of the pound to dip.
Consumer confidence levels. Currency traders typically analyse a variety of confidence indices to gauge the mood of the British and American public.
Major political events. A change in a country’s leadership can have a positive or negative influence on trader sentiment, depending on the policies being proposed by the new administration.
Sterling enjoyed a steady rise against the dollar between 2002 and the autumn of 2007, climbing from $1.40 to $2.10 over that time span. A booming British economy and relatively high interest rates played their part. However, the pound lost momentum during the global economic downturn, and has endured a notable decline since the summer of 2016.
A range of factors have caused the value of sterling to tumble since June 2016. The UK’s referendum decision to leave the European Union pushed the pound to 30-year lows against the American currency. Meanwhile, the Federal Reserve’s decision to raise US interest rates in December 2015 and again at the end of 2016 also favoured the dollar.
Yet while the pound has at times slipped beneath the $1.20 mark since the Brexit vote, it’s not fallen anywhere near its all-time low of $1.05, recorded back in February 1985. Rather than being caused by any significant weaknesses in the British economy, the re-election of President Ronald Reagan was behind that record weakness in the pound. Mr Reagan introduced tax cuts and spending hikes across the Atlantic, which boosted confidence in the US and attracted investors to the country.
Thanks to the long histories, stability and economic stature of the two countries involved, the GBP/USD currency pair is very popular with traders. That ultimately makes it a highly liquid market, meaning investors have plenty of buyers and sellers to do deals with. The market’s liquidity also allows for trades to be made quickly, helping investors take advantage of rapid movements in the exchange rate.
On the flipside, global currency markets can prove difficult to navigate, with the sterling/dollar pairing no exception. Investors are encouraged to tread with caution, keeping a close eye on the relative performances of the British and American economies, and carefully scrutinising previous exchange rate movements.
To learn more about this market, it’s worth dropping in on some sterling/dollar traders on eToro to see what their views are…
*This content is for information and educational purposes only and should not be considered investment advice or an investment recommendation.
*Past performance is not an indication of future results. All trading carries risk. Only risk capital you're prepared to lose.
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