The other two major currency
pairs are GBP/USD (affectionately known as sterling or cable) and USD/CHF
(called Swissy by market traders). These two are counted as major currency
pairs but their trading volume and liquidity are significantly less than
EUR/USD or USD/JPY. As a result, their trading characteristics are very similar
to each other. We will look at their individual trading fundamentals separately
and then discuss their trading behavior and tactical trading considerations
together.
The British pound: GBP/USD
Trading in cable presents its own
set of challenges, because the pair is prone to sharp price movements and
seemingly chaotic price action. But it’s exactly this type of price behavior
that keeps the speculators coming back - when you’re right, you’ll know very
quickly, and the short-term results can be significant.
Trading
fundamental of GBP/USD
The UK economy is the second largest
national economy in Europe, after Germany, and the pound is heavily influenced
by cross-border trade and mergers and acquisitions (M&A) activity between
the United Kingdom and continental Europe. Upwards of two-thirds of UK foreign
trade is conducted with EU member states, making the EUR/GBP cross one of the
most important trade-driven cross rates.
The 2004 BIS survey of foreign
exchange turnover showed that GBP/USD accounted for 14 percent of global daily
trading volume, making cable the third most active pairing in the majors. But
you may not believe that when you start trading cable, where liquidity seems
always to be at a premium. Relatively lower liquidity is most evident in the
larger bid-offer spread, which is usually 3 to 5 pips compared to 2 to 4 pips
in EUR/USD and USD/JPY.
Trading
sterling by the numbers
GBP/USD is quoted in terms of the
number of dollars it takes to buy a pound, so a rate of 1.8515 means it costs
$1.8515 to buy £1. The GBP
is the primary currency in the pair and the USD is the secondary currency. That
means
- GBP/USD is traded in amounts denominated in GBP. In online currency trading platforms, standard lot sizes are £100,000, and mini lot sizes are £10,000.
- The pip value, or minimum price fluctuation, is denominated in USD.
- Profit and loss accrue in USD. For one standard lot position size, each pip is worth $10; for one mini lot position, size, each pip is worth $1.
- Margin calculations are typically calculated in USD in online trading platforms. Because of its high relative value to the USD, trading in GBP pairs requires the greatest amount of margin on a per-lot basis. At a GBP/USD rate of 1.9000, to trade a one-lot position worth £100,000, it’ll take $1,900 in available margin (based on 100:1 leverage). That calculation will change over time, of course, based on the level of the GBP/USD exchange rate. A higher GBP/USD rate will require more USD in available margin collateral, and a lower GBP/USD rate will need less USD in margin.
Trading
alongside EUR/USD, but with a lot more zip!
Cable is similar to the EUR/USD
in that it trades inversely to the overall USD. But While EUR/USD frequently
gets bogged down in tremendous two-way liquidity, cable exhibits much more
abrupt volatility and more extreme overall price movements. If U.S. economic
news disappoints, for instance, both sterling and EUR/USD will move higher. But
if EUR/USD sees a 60-point rally on the day, cable may see a 100+ point rally.
This goes back to liquidity and a
generally lower level of market interest in cable. In terms of daily global
trading sessions, cable volume is at its peak during the UK/European trading
day, but that level of liquidity shrinks considerably in the New York afternoon
and Asian trading sessions. During those off-peak times, cable can see
significant short-term price moves simply on the basis of position-adjustments
(for example, shorts getting squeezed out).
Another important difference
between cable and EUR/USD comes in their different reactions to domestic
economic/news developments. Cable tends to display more explosive reactions to
unexpected UK news/data than EUR/USD does to similar Eurozone news/data. For
example, if better than expected Eurozone data comes out, EUR/USD may only
politely acknowledge the data and move marginally higher. But if surprisingly
strong UK data is reported, GBP/USD can take off on a moonshot.
Important
UK data reports
Cable tends to react sharply to
UK economic reports, especially when the data is in the opposite direction of
expectations, or when the data is contrary to current monetary policy
speculation. For example, if the market is expecting that the next rate move by
the Bank of England (BOE) will be higher, and a monthly inflation report is
released indicating a drop in price pressures, then GBP/USD is likely to drop
quickly as interest rate bets are unwound.
Key UK data reports to watch for
are
· BOE Monetary Policy Committed (MPC) rate
decisions, as well as speeches by MPC members and the BOE governor
·
BOE MPC minutes (released two weeks after each
MPC meeting)
·
Inflation gauges, such as CPI, PPI, and the
British Retailers Consortium (BRC) shop
price index
·
Retail sales and the BRC retail sales monitor
·
Royal Institution of Chartered Surveyors (RICS)
house price balance
·
Industrial and manufacturing production
·
Trade balance
·
GFK (a private market research firm) UK consumer
confidence survey
