GBP/USD Technical Analysis and Trading Strategies
When choosing a trading pair for Forex transactions, pay attention to GBP/USD. This tool provides traders with many opportunities to make money in the financial market. If you want to learn technical analysis of this pair and trading strategies, then this guide will help you figure it out.
What is the currency pair GBP/USD?
GBP/USD represents the exchange rate between the British pound sterling (GBP) and the US dollar (USD). Understanding the fundamentals of this major currency pair provides context for the technical analysis.
Definition of the GBP/USD pair
The GBP/USD Forex pair refers to the British pound sterling (GBP) exchanged for the US dollar (USD). It expresses how many US dollars you would get for one British pound based on the current market exchange rate.
For example, a rate of 1.3000 means 1 pound equals 1.30 dollars. If the GBP/USD rate rises, it means the pound is strengthening vs the dollar. If the rate declines, it signifies dollar strength over the pound.
GBP/USD is one of the most widely traded and liquid currency pairs in the global forex market due to the high volume and volatility between the pound and dollar. It tends to see significant moves during the European and North American trading sessions.
Why GBP/USD is a major trading pair
There are several key reasons why GBP/USD is considered a major forex trading pair:
- High liquidity - The deep liquidity makes it easy for traders to enter and exit trades smoothly. There is ample volume and tight bid/ask spreads.
- Volatility - The pound frequently sees high volatility and large moves versus the US dollar, leading to plenty of opportunities.
- Availability - this pair can be traded 24 hours a day during the week since it involves two of the world's largest financial centres in London and New York.
- Macroeconomic forces - Big macro drivers like monetary policy, growth, and inflation impact GBP and USD inversely during risk-on and risk-off moves.
- Reserve currencies - The British pound and the US dollar are both major global reserve currencies with constant demand among central banks and forex traders.
With ample liquidity, volatility, and global importance, GBP to USD presents an excellent currency pair for forex traders to implement technical analysis and trading strategies. Many advanced and beginner traders focus primarily on GBP/USD because it provides so much opportunity to potentially profit.
Fundamental Analysis of GBP/USD
Fundamental analysis examines how economic or political forces impact currency pairs. With GBP to USD exchange rate, you need to understand how major developments affect the British pound and US dollar separately.
Factors that influence GBP/USD price
Some of the key fundamental factors that drive price action include:
- Economic performance - Relative strength of UK and US growth, inflation, employment, and other data. For example, robust UK data boosts GBP while weak US data weighs on the USD.
- Monetary policy - Interest rate decisions, quantitative easing, and monetary policy outlook from the Bank of England (BoE) and the US Federal Reserve. Hawkish BoE policy supports GBP. Dovish Fed policy weakens USD.
- Political uncertainty - Geopolitical events like Brexit, UK general elections, tensions with the EU, and changing US-UK relations impact GBP volatility.
- Commodity prices - Fluctuations in oil and gold prices affect inflation and currency prices. The pound tends to weaken with lower oil.
- Risk sentiment - In times of market stress and risk aversion, USD benefits from safe-haven flows, weighing on GBP USD. Improving sentiment boosts the pair.
- Market stability - Liquidity issues, deleveraging, and risk of contagion in global markets during crises strain GBP and USD liquidity.
In addition to these broader themes, GBP USD is impacted heavily by specific UK and US economic data releases. These must be monitored closely on the economic calendar.
Free and up-to-date information is available to all registered IQ Option traders in the news and economic calendar section.
Economic reports to watch
The most impactful UK and US economic reports for GBP/USD trading include:
- Decisions of Bank of England about interest rate
- GDP, manufacturing, construction, services PMI
- Jobs data like claimant count, average earnings
- CPI, PPI, retail sales
- Decisions of Federal Reserve about interest rate
- Non-farm payrolls, unemployment rate
- GDP, durable goods, new home sales
- Consumer price index, PPI
- Consumer confidence surveys
These reports move GBP/USD sharply when the data surprises expectations. Traders must be aware of market expectations through consensus forecasts.
Impact of Brexit and US relations
One of the major long-term themes impacting GBP/USD is Brexit and the changing relationship between the UK and the European Union. Ongoing trade negotiations, regulatory changes, UK data, and political uncertainty all affect the pound.
Developments in US-UK relations following Brexit also influence GBP pricing. The countries may strike a favourable bilateral trade deal. However, Joe Biden could also increase pressure on the UK over the Northern Ireland protocol dispute. These political factors can cause sharp GBP/USD volatility.
Price Action and Trend Analysis
In addition to macro fundamental forces, you have to examine the actual GBP/USD price charts to conduct a technical GBP USD analysis. This involves reviewing the recent price action, trends, support/resistance levels, volatility, volume, and chart patterns.
Reviewing recent price charts and trends
Start by analysing GBP/USD's price action on the daily and 4-hour time frame. Look at the current trend direction and momentum. For example, if the 20-day moving average is rising and the price is making consecutive higher highs, GBP/USD is in a clear uptrend.
You also want to spot potential reversals if the price breaks key supports. If GBP/USD drops below its 50-day moving average plus a long-term rising trendline, it signals the trend may be changing from up to down.
If we look at the GBP/USD chart, globally we see a downtrend since 2007, which continues until now. The price is now pushing to the support level of 1.19-1.21. A breakdown to the level of 1.09-1.03 is likely.
Use chart patterns like double tops or head and shoulders formations to anticipate potential reversals as well. Candlestick patterns can also indicate momentum shifts.
Identifying key support and resistance levels
Next, note the critical GBP/USD support and resistance levels on the charts using horizontal lines. Former resistance becomes support when broken and vice versa.
For instance, GBP/USD may have support around the 1.19-1.21 zone based on previous price action. Resistance could be present around 1.2500. These levels often see increased volatility and reversals.
Look left on longer time frames to spot historic price levels. Price often reacts around major round numbers like 1.2000 as psychological support/resistance too.
Using technical indicators for GBP/USD analysis today
Oscillators like the RSI, MACD, and Stochastic can reveal overbought and oversold conditions and gauge trend strength. For example, an RSI above 70 signals overbought conditions for a potential correction lower in GBP/USD.
Overlay indicators like 20 or 50-period moving averages portray the overall trend. The faster moving average crossing above the slower MA signals an upward trend change.
Use more than 100 technical analysis tools on the IQ Option platform. Indicators, charts, graphical tools, various widgets and time frame settings will help you make a more correct forecast.
The probable crossover of the 50-day moving average (MA) below the 200-day MA, often referred to as a “death cross”, is typically seen as a bearish signal in technical analysis.
Trading Strategies and Tips
Let's explore some trading strategies and tips for capitalising on GBP/USD price action based on technical analysis and chart patterns.
Trend trading strategies
Trading in the direction of the prevailing trend is generally an optimal strategy. You can apply a moving average crossover system to catch new uptrends and downtrends.
How to identify and trade the trend:
- Use the 50-day and 100-day simple moving averages (SMAs) to gauge the direction of the major trend on daily charts.
- When the faster 50-day SMA crosses above the 100-day SMA, it signals a new uptrend, and the reverse signals a downtrend.
- Enter long positions when the price pulls back to the 50-day SMA in an uptrend.
- Enter short positions when the price rallies to the 50-day SMA in a downtrend.
- Book partial profits at key swing highs and lows. Move the stop loss to breakeven.
- Trail the stop under major swing lows/highs to lock in more profits in the direction of the trend.
Range trading strategies
The pair often trades in a range between horizontal support and resistance levels. You can take advantage of this swinging price movement by buying near support and selling near resistance.
Trading between support and resistance:
- Identify clear horizontal support and resistance levels containing GBP/USD price action.
- But when the price pulls back near support in the range. Sell when the price approaches resistance.
- Take profits on longs at the range resistance. Close shorts at the range support.
- Use the stochastic oscillator to time oversold and overbought RSI levels where reversals happen.
- Set stop losses below support on longs or above resistance on shorts to limit risk in case of a breakout.
Breakout trading strategies
When GBP/USD breaks out forcefully above resistance or below support, it signals sharp directional momentum. You can trade breakouts using momentum and swing trading tactics.
Trading breakouts from ranges:
- Identify horizontal support and resistance levels containing the price. Draw trendlines connecting the points.
- If GBP/USD closes decisively above resistance or below support, it signals a breakout.
- Enter buy-stop orders just above the resistance when a break higher looks imminent.
- Enter sell-stop orders just below support if it's breaking down.
- Use a trailing stop loss to ride the momentum. Book partial profits at the next key level.
- Alternatively, fade the breakout back into the range if it looks like a false breakout.
Managing risk with stop losses
Given GBP/USD's volatility, it's essential to manage your risk on every trade using stop-loss orders. This defines and limits your risk on each trade.
Set stop losses below recent swing lows when going long. Place stops above recent swing highs when shorting. Move the stop into profit to lock in gains when the position moves in your favour.
Here is an example risk management table for GBP/USD:
|Risk per Trade
The wider the stop distance from entry based on volatility, the lower the position size you should trade.
In addition to broader moves, GBP/USD presents ample short-term trading opportunities. Here are some tips for intraday trading strategies.
News trading strategies
Around high-impact UK or US data releases, use low-risk strategies to trade the volatility. Have orders ready to buy on positive news and sell on negative data surprises. Manage risk closely with wide stops.
Scalp small intraday moves and ranges using the 5-minute or 15-minute GBP/USD charts. Look for minor support/resistance levels to fade. Use tight stops of 10-20 pips on these quick trades.
Using technical indicators for trades
Oscillators like the 5-minute RSI or stochastic show oversold/overbought levels on smaller time frames. Trade pullbacks from extremes reading above 80 or below 20.
For longer-term trading, it's essential to consider macro fundamental trends in addition to technical factors on the weekly and monthly charts.
Fundamental analysis approach
Analyse the key long-term macroeconomic and political themes impacting GBP and USD. For example, consider the divergent monetary policies of the Fed and BoE. Brexit risks also point to GBP downside.
Position trading tips and strategies:
- Look for very strong support and resistance levels on weekly charts to trade reversals.
- Enter off the 200-week moving average and use wide stops above/below.
- Ride broader momentum for weeks or months. Use trailing stops to lock in.
- Hold positions through short-term volatility using wide stops of 100-400 pips.
Trading Sessions to Watch
GBP/USD volatility tends to spike at the opening of certain trading sessions, presenting opportunities to trade the markets.
Volatility spikes during the London open at 3 AM - 7 AM EST as UK economic data is released. This sees large moves as UK markets react to the news first.
New York session
The US open 8-10 AM EST also brings volatile moves during the overlap with UK traders. Watch for US data events, Fed speak, and US equity moves impacting the dollar.
Here is a table outlining the major GBP/USD trading sessions:
|5 PM EST
|Some GBP/USD movement
|7 PM EST
|Decent volatility, Japanese data released
|3 AM EST
|Big moves, UK data and Brexit news
|New York Open
|8 AM EST
|Volatile session, US news and data
|12 PM EST
|Some volatility as London wraps up
Top Trading Tips
Here are some final tips for effectively trading GBP/USD:
Use proper risk management
Always use stop losses, limit position size, and don't risk more than 1-2% of capital per trade given GBP/USD's volatility. Consider reducing risk if stops are wide.
Analyse charts across time frames
Perform multi-timeframe analysis top-down from monthly, weekly, daily, and 4 hours down to hourly. Identify confluence and key levels across higher and lower time frames.
Keep up with economic events
Follow BoE, Fed meetings and UK/US data through economic calendars. Set alerts for market-moving events to be aware of upcoming potential trading opportunities.
Summary of Technical Analysis
In summary, GBP/USD remains stuck in a range between support around 1.2000 and resistance at 1.2500. Broad fundamental pressures of Brexit woes and dollar strength are weighing on the pair.
However, technicals point to a potential bullish reversal above 1.2500 opening upside towards 1.2800. Traders should look for opportunities to buy dips targeting range highs while staying nimble in case of a breakdown below 1.2000.
Is GBP USD expected to rise or fall?
GBP/USD remains stuck in a range, so it's unclear if it will break out higher or lower in the near term. Fundamentally, downside risks persist for the pound due to Brexit uncertainty and a dovish Bank of England. However, the pair could rally if the BoE takes a more hawkish tone or progress is made in UK-EU trade negotiations.
What is the prediction for GBP vs USD?
Most analysts see GBP/USD trading in a range between support around 1.2000 and resistance at 1.2500 in the coming months. Macro headwinds for both the UK and US economies point to a period of consolidation ahead. However, a decisive break above resistance could open the door for a move back to 1.3000.
When was the pound strongest against the Dollar?
In recent history, GBP/USD reached its peak of around 2.11 in July 2008 prior to the global financial crisis. The pound has generally been weaker against the dollar in the years since due to Brexit uncertainty and loose monetary policy from the Bank of England weighing on sterling.
Why is GBP falling against the USD?
The British pound has faced headwinds recently due to a deteriorating UK economic outlook, rising risks of a hard Brexit without an EU trade deal, and increased expectations for BoE rate cuts. Meanwhile, the US dollar has been bid higher as a haven during market turmoil. This combination has weighed on GBP/USD.
Is the GBP USD a buy or sell?
GBP/USD's range-bound price action makes it difficult to determine a clear direction currently. Traders may want to wait for a break above 1.2500 or break below 1.2000 before establishing a longer-term trend bias. In the meantime, traders should look for short-term range trading opportunities buying dips and selling rallies.