Trading the GBP/USD? Here’s the Economic Data to Watch

The GBP/USD is the third most commonly traded forex pair, accounting for 9.5% of the daily foreign exchange turnover. As of April 11, 2023, £1 Pound was valued at $1.25, the highest it had reached since June 2022, with the British Pound having risen 3.3% to become the best-performing currency among the developed economies.

Why Trade the GBP/USD

• It is a major currency pair, which means it sees high liquidity. This leads to better chances of trade execution at lower spreads.
• Since both currencies are among the earliest among the developed economies, they react quickly to economic reports, giving the currency pair a wider price range than any other pair.
• A simple move can mean a significant pip change, i.e., the pair has higher volatility compared to most other pairs. This offers more trading opportunities.

Experienced traders remain cautious and use risk management techniques, such as stop loss and take profit, since higher volatility also means a higher risk of unpredictable price swings.

When to Trade the GBP/USD Pair?

The time when the London and New York trading sessions overlap tends to see the highest volatility and liquidity in the market. Therefore, this period is preferred by many traders.

If you’re forex trading and the Cable (the nickname for the GBP/USD pair) is an asset you’re interested in trading, then read on to learn all about the economic data that impacts this currency pair.

Economic Indicators That Impact the GBP/USD

There are multiple economic indicators that impact the pair.

The major ones are discussed in detail below.

US Non-Farm Payroll

The US NFP is the most influential economic data for the forex markets. It is released on the first Friday of each month, at 8:30 am (EST) and indicates the jobs added or lost in the US economy. When jobs are added, it indicates general economic strength and growth potential. This exerts upward pressure on the greenback.

The British Consumer Price Index (CPI) and Producer Price Index (PPI)

Inflation and prices of consumables are the most impactful economic data for the British pound. The Bank of England (BoE) uses this report to set its inflation target and plan monetary and fiscal policies. Therefore, it is of prime importance in gauging the strength or weakness of the GBP. The PPI measures inflation at the raw material level. Therefore, traders refer to both reports to get a clearer picture. Readings stronger than the forecast tend to strengthen the GBP.

The US GDP

In the US, GDP and interest rates have a positive correlation. Growth in the GDP tends to attract foreign investment, thus pushing the dollar higher. The Bureau of Economic Analysis releases quarterly reports, a month after the end of each quarter.

The BoE Inflation Rate

The Monetary Policy Committee of the BoE determines the bank interest rate every month. Its goal is to maintain low inflation and the confidence of citizens. By April 2023, the BoE’s had raised the interest rate 11 consecutive times. At the end of March, the central bank had announced a 25-basis point increase, with the interest rate hitting 4.25%,  in line with analyst expectations. This lent support and pushed the pound sterling a little higher against the greenback.

US Trade Balance

The UK is one of the top 5 importers of American produce. Amid sanctions against Russia, the US has become the primary source of oil supply for Europe. This has positive impacted the USD. The US trade balance hugely impacts the BGP/USD forex pair. When the trade balance is in surplus, demand for the dollar tends to rise, while a trade deficit spells downside for the greenback.

Consumer Confidence in the UK

Surveys and media chatter in the UK are important to gauge the market sentiment in the country. Economic data, such as the Gfk Consumer Confidence and NCCI (National Consumer Confidence Index), help traders understand the economic environment and employment status in the UK. While the NCCI focuses on the current situation and the outlook for the next 6 months, the Gfk accounts for the past 12 months. Together they present a complete picture of the confidence trend.

Federal Reserve’s Interest Rate Decisions

The Fed hikes interest rates to check inflation in the US and has been a driving force in the nation narrowly escaping recession in 2022. The reason was the Fed’s aggressive monetary tightening. Higher interest rates foster foreign interest and increase the demand for the dollar, exerting upward pressure on the USD. 

Demand for the Dollar

The US dollar is the world’s reserve currency. Therefore, its demand highly impacts all other currencies. However, the greenback’s dominance has been threatened in recent times. Over the years, the euro, Japanese yen and British pound sterling are increasingly being considered as alternate reserve currencies. Additionally, the rise of cryptocurrencies, which are gaining global acceptance (though slowly), may change the future of the dollar.

Trading the GBP/USD Pair

Although traders can opt for multiple ways to trade the forex pair, including spot trading and options trading, CFD trading is one of the popular techniques of taking advantage of price fluctuations in the Cable. CFD trading allows traders to speculate on both rising and falling prices, which means more trading opportunities. It also allows the use of leverage to increase exposure to the market.

GBP/USD Trading Strategy

A popular strategy is trading the news. Whenever macroeconomic news from either of the two countries is released, the currency pair tends to see major swings, especially when the release does not align with market expectations. Leveraging these opportunities is known as news trading. While some traders prefer to trade before the release, based on analyst predictions, others trade the market reaction after the release. More conservative traders wait for the markets to digest the news and trade the fade.

To Sum Up

• Macroeconomic events in the US and UK impact the GBP/USD trading pair.
• Traders keep an eye on the economic data of both countries to make the most of the trading opportunities that arise when such data is released.

Forex trading using CFDs helps traders hedge their positions, reducing the associated risk.

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