1. Forex Currencies: Introduction
  2. Forex Currencies: Trading Strategies
  3. Forex Currencies: Ways To Trade
  4. Forex Currencies: The Four Major Pairs
  5. Forex Currencies: The EUR/USD
  6. Forex Currencies: The USD/JPY
  7. Forex Currencies: The GBP/USD
  8. Forex Currencies: The USD/CHF
  9. Forex Currencies: Commodity Pairs (USD/CAD, USD/AUD, USD/NZD)
  10. Forex Currencies: Currency Cross Rates
  11. Forex Currencies: Emerging Market Currencies
  12. Forex Currencies: Conclusion

Although it is small in terms of land mass, the economy of the United Kingdom (U.K.) is prosperous. The British (U.K.) pound sterling (or pound) plays an important role in the international financial markets; therefore, investors may want to consider trading it in a pair against the U.S. dollar.

The Economy Of The United Kingdom

For more than a century, the United Kingdom was the most powerful nation in the world. The U.K.'s economy was the world's largest, and the small island nation dominated international trade. During this time, the British pound served as the world's reserve currency. Following the World War I and II, the United Kingdom entered into a period of relative decline as the United States ascended to the position of the world's dominant economic power. The U.K.'s growth also stagnated as heavy government regulation and rigid labor markets impeded economic activity.

However, the U.K. remained reasonably prosperous, and since the 1980s, the country has regained much of its previously lost economic vitality. This rise has coincided with the U.K.'s enhanced reputation as a center for global finance. As U.K. and foreign bankers have flocked to London to seek their fortunes, the financial sector has become a more important part of the U.K.'s overall economy. In fact, financial services make up 7.2% of the U.K.'s total economic output. London accounted for 51% of the financial and insurance sector total Gross Value Added in 2015.Therefore, the direction of the financial markets and the strength of the financial sector play a large role in determining the health of the U.K. economy. (For more on this topic, see: How the UK Makes Money)

The British (U.K.) Pound Sterling

On June 23, 2016, people in the U.K. went to the polls in what is known as the United Kingdom European Union membership referendum, or Brexit referendum. The result was that a majority of voters voted in favor of leaving the EU. While the legal details of withdrawl take years to complete, the process is underway and is expected to be complete by March 30, 2019. Regardless of the withdrawal from the EU, the country remains outside the eurozone (the European Monetary Union) and maintains its own currency, the British pound sterling. (For further reading, see: How Brexit Can Affect the European Economy

Before the U.S. dollar became the world's reserve currency, the British pound served that role for more than a century. The pound remains an important currency and a popular trading vehicle for traders of all types. The U.S. dollar and the pound are actively traded between each other, and the pair has earned a special nickname among traders, who call it "the cable" in reference to the time when bid and ask quotes were transferred between New York and London via underwater cables across the Atlantic. (For more on trading the GBP, see Top 8 Most Tradable Currencies.)

Trading the British Pound/U.S. Dollar

The GBP/USD is one of the most liquid in the currency market. Bid-ask spreads are tight, and arbitrage opportunities are unlikely to exist. However, the liquidity of the pair combined with the availability of trading instruments makes the GBP/USD an excellent choice for all types of currency traders.

As with the euro/U.S. dollar, the most important factor in determining the relationship between the U.S. dollar and the British pound is the relative strength of the countries' respective economies. When U.S. economic performance is stronger than the U.K.'s, the dollar usually strengthens against the pound. When the U.K.'s economy outperforms that of the U.S., the dollar generally weakens against the pound. This relative strength is often reflected in domestic interest rates, so traders should look carefully at the relationship between U.S. and U.K. interest rates. Because both the U.S. and the U.K. boast very large financial hubs, the performance of the countries' financial sectors and financial markets can also be important in explaining relative currency movements.

Taking a look at the three-year weekly chart of the British Pound to U.S. Dollar (GBP/USD), you can see that the pounded weakened relative to the U.S. dollar for much of 2015 and 2016, but was able to reverse course over 2017 to 2018. The defined channel pattern that has formed on the chart will likely act as strong guides for active traders when determining where to place their buy and stop-loss orders. (For more on this topic, check out: Channeling: Charting A Path To Success)

Forex Currencies: The USD/CHF
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