Mastering the GBP/USD

After talking about the EUR/USD pair, let’s move to the second largest economy in Europe after Germany, Great Britain. Great Britain is filled with rich history and beautiful landscapes. Unfortunately, the Pound is not as easy going. The GBP is known for unexpected spikes and chaotic price action. Despite accounting for 14% of daily currency trading volume, the GBP/USD does not have the high liquidity that the EUR/USD offers. However, this short term spikes can be an easy lunch for some savvy traders.

The good news is that Great Britain is not all that involved with the debt crisis that is hurting most of Europe currently due to its refusal to join the Euro. The bad news is the Britain’s economy has been contracting, throwing the country into a recession. In addition, the country does have the highest debt load on record, according to several British media sources. However, several British media outlets have printed stories saying that the country’s economy could see a nice rebound in the third quarter.

Before we go any further there are a few things that you should know about the British Pound. Firstly, as I stated above the GBP/USD is much more volatile than EUR/USD. This creates short term volatile spikes which can be hard to swallow if you are not prepared for them. Secondly, the Pound is extremely sensitive to rate changes from the Bank of England. If you trade this pair, you need to write out all the expected Bank of England events because you could lose a lot of money if you don’t. Additionally, the GBP/USD pair is extremely sensitive to US economic data reports. This means GDP, unemployment, payrolls, retail sales, consumer sentiment, etc. Some Forex pros say that US economic data affects the GBP/USD pair more than the EUR/USD pair, mostly due to the lack of liquidity that the EUR/USD has in spades.

If you are a technical trader this next warning is extremely important to know. The fact is the Pound has unreliable technical analysis. What I mean by that is there are a lot of false breakouts/breakdowns. This makes it extremely difficult for technical traders to determine their next move. Unless you have been studying and thoroughly understand the GBP/USD pair, it could get ugly if you rely solely on technicals. Remember what I said though in my EUR/USD article; always back up your technical findings with the underlying fundamentals. If you find bullish technicals with bullish fundamentals, you have a winner.

The bottom line here is the GBP/USD pair is a much sensitive pair overall than the EUR/USD. This can be an advantage or disadvantage depending on your level of trading. One thing that is for sure is that the GBP/USD relies very heavily on fundamentals. That is why I recommend the GBP/USD to fundamental traders and not to technical traders. The EUR/USD has a healthy balance of fundamental and technical, making it a great pair to trade and certainly price action is much clearer than the GBP/USD. I highly recommend that if you are new to currency trading or not familiar with the GBP/USD that you paper trade the pair for awhile until you learn the ropes. Paper trading this pair could save you a lot of grief and money.

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About Matt Rego

Matt has been trading for many years and is an experienced financial author. His main focus is the Forex market. Visit Matt on Google+.