GBP/USD

With help of the GBP USD exchange rate live chart, we are enabled to perform live technical analysis with popular technical indicators. Some of the more popular indicators are in fact trend lines that show if the trend is upwards, downwards, or lateral. The MACD is mainly used to reflect market trends, ie. bear or bull markets. whilst the RSI indicator (relative strength index) is used to figure out when the price is oversold or overbought vs the prevailing trend.

To be successful trading or investing in the British Pound against the US Dollar pair, it is largely linked to your accuracy in predicting GBP USD prices through a forecast. First, you need to produce your forecast, then you need to buy or sell (depending on your strategy) certain amounts of GBP USD currency before everyone else does. So GBP USD trading and investing is to some extent trying to work out the true value from available prices of the GBP USD Forex pair, and trying to see if the Forex market agrees with your findings. Equally important is to have in place an exit strategy for situations whereby your GBP USD forecast pans out wrongly.

There are two main ways of trying to understand where GBP USD is going. The first school is called macroeconomic analysis and involves understanding the current economic, political, and monetary situation of the U.K. and the U.S.A, and investing in the currency of the country anticipated to outperform. Most of the time, people will focus on which country will have the highest interest rates, as it is the price of money e.g. the GBP or USD. Whilst sometimes investors focus more on economic growth outperformance, e.g. buy the currency of the country that has grown the strongest. The key interest of each country is thankfully linked to economic growth and inflation expectations, so there is a large overlap.

Some say that looking at the current country situation is enough as country dynamics change slowly, whilst other investors are only concerned with the future state of the respective economy, political, and monetary conditions. The truth is that both probably matter, present and future, and that helps to avoid focusing on obscure data or views that the general public will unlikely see.

The other major school is the focus on historical price patterns in the GBP USD, this school of thought is called technical analysis. Here, the general idea is to follow the GBP USD price trend and trade with it or try to figure out when the trend will reverse, or try to forecast when a trend will commence.  

Both schools are important, but if you are trying to figure out the GBP USD long-term forecast, then the macroeconomics tends to beat technical analysis. It is because technical analysis focuses only on what happened in the past, and how this might repeat itself. It does not focus on the factors that affect importers and exporters, investors, or central bankers. Whilst, the macroeconomist does just that, when deriving their GBP USD long-term forecast.

Whilst you are trying to figure out the GBP USD forecast today or a general short-term GBP USD forecast, then the technical analysis is the better option because it can offer you exact price levels to manage your positions. Macroeconomic analysis is good with long term direction, but terrible in pinpointing where the price should be in the short-term. That is why most macroeconomists have quarterly and annual price targets, as they don’t know when the price will reach their objectives.

This does, however, not exclude macroeconomics altogether, because major macroeconomic events happen almost every week, which means that short-term traders need to keep an eye on the economic calendar to know when market volatility in the GBP USD could spike.  

There are various ways of trading with the help of technical analysis, so in this article, we will limit ourselves to one, very powerful trading pattern: the rectangle.

At its core, the rectangle pattern is when the GBP USD pair is trapped by a well-defined price floor, and a well-defined price ceiling,  the former is called support, and the latter is called resistance. Say that the price of GBP USD bounces from 1.15 several times in May, and June, and is also capped by 1.17 in the same months. As you can see, the support comes in at 1.15 and that resistance is at 1.17. The difference between these two levels is 0.02.

If the GBP USD would trade below 1.15, then that would place all buyers in May and June at a loss, and they would probably close their position just below 1.15 to minimize their losses. This means that when the price trades below 1.15 the selling pressure will be higher than the buying pressure and the price will decline.

How much could the price decline? Per the rectangle pattern, the difference between the support level at 1.15, and the resistance at 1.17, is subtracted from the support level, which means that the price could reach 1.15 - 0.02 = 1.13, a drop of 200 pips. If the price would trade above 1.17, we would instead assume that the price would reach 1.19. Trading when the price breaks the support or resistance levels is called breakout trading and is probably the easiest way to trade as it is clear what one should do when the price breaches the range.

Armed with the rectangle pattern you can look for this chart pattern in the various time frames like the five-minute chart if you are interested in short-term trading, or maybe the four-hour or daily chart for longer-term trading. In general, the smaller the time frame such as the five-minute chart, the higher the risk that the pattern will not work well. The same chart pattern on the daily GBP USD chart is probably the most reliable.  and now you have a way to analyze the GBP USD chart.

The cost to borrow or lend money is a key factor for currency traders. As an example, if you have 100,000 to invest, would you deposit your money with a UK bank that pays a 3% return per year or with a US bank that pays 1% per year? If there are no differences in the offers or risks of each bank, then the rational option is to place your 100,000 with a UK bank, as you will receive a higher return.

High interest rates are also a symptom of high economic growth and or high inflation. High economic growth is good, whilst high inflation, the erosion of the value of money is not good.

When economic growth is high in a country, interest rates, which are the cost of borrowing money, tend to rise as the competition to borrow money increases. As an example, Euro area interest rates have been low for a long time as the economic chances to invest are low, and as inflation is low. Whilst in many emerging markets, where there are a lot of opportunities to make business, more people will be interested to borrow money, and hence boost interest rates in that specific country.

High-interest rates will therefore attract money that would like to lock in the high returns with the banks. But also people that would like to invest in the country.

High inflation means that the value of money is dropping, and that can discourage investment.  

High economic growth and high interest rate tend therefore to attract capital flows, and that will boost the value of a currency. Whilst inflation will have the opposite effect. When investors invest in a country and its currency, they tend to look at relative economic growth, inflation, and interest rates and invest in the best-performing country.  

The Forex market for GBP USD currency trading hours begins from Sunday to Friday New York Time (EST). However, market activity for said Pound Dollar currency pair is not always high. Typically, most of the volume is executed within European business hours.

The Japanese banks usually wait until afternoon for London and Frankfurt to come online before making their exchanges, thus the London foreign exchange sees a lot of trade activity and is the busiest at this time. Around midday, London time, New York traders join as it is morning on the East coast and the highest amount of GBP USD is traded. After 17:00 London time, trading volumes have already started to dwindle. But trading remains open as the US traders are still at their desks and will be joined by Asia once more.

As trading is muted during the Asian trading session, most prices tend to remain in narrow price ranges. This means that GBP USD traders will do better using range bound trading strategies during the Asian session.

A range-bound GBP USD strategy means that we sell when the price reaches resistance and buy when the price reaches support levels. Also, because the price changes are small, people adapt and try to make many small profits. To make it profitable to make money on small price changes, brokers like ATFX offer leverage, that way a small percentage change can be multiplied, e.g. a 0.1% change can be turned to 1% change, 10% or higher. But at the same time, it is important to understand that high leverage could also hurt you if the price turns against you. This is the reason ATFX as a broker offers keen traders free courses and trading tools focussed on optimized control and risk management.

As the European business session tends to see the biggest trading we tend to see the break to the Asian trading ranges. For example, GBP USD might trade between 1.15 and 1.16 most of the Asian session, but as London and Frankfurt join the price will likely try to break the 1.15 support level and try to reach 1.14, or break 1.16 and try to reach 1.17.

Certain types of traders tend to find breakout trading appealing and therefore use breakout systems during this GBP USD trading session. A breakout strategy means that they buy when the price breaches a prior high, with the anticipation that the price will keep on gaining. If GBP USD breaks down, they will short-sell, that is to bet on the price to keep on dropping, when the price slides below support levels.

In summary, the European session is the most active trading session, and most see it as the best time to trade the GBP USD, but in the end, it depends on each person’s personality and trading strategy, but also the ability to trade. As an example, it would be hard for a Japanese trader to stay awake each night to trade the European session. The best months to trade GBP USD are non-summer months as market volatility tends to be low during the European summer. With ATFX you can trade Sunday to Friday and enjoy low spreads throughout all sessions.