CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 75.00% of retail investor accounts lose money when trading CFDs with this provider. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.
The Great British Pound (GBP) had spiked 1.38% versus the US dollar over three months, as of July 8th, 2024. The GBP has overshadowed the euro (EUR) and the US dollar (USD), outperforming all major currencies. The strength of the pound sterling has encouraged the Bank of England (BoE) to hold interest rates steady. Highlighting the resilience of the British economy, the impressive gains in the domestic currency have sparked conversations and speculations among analysts and investors alike.
This article unveils the factors behind the strength of the pound sterling and how GBP/USD traders can take advantage of the rally via CFD trading.
Several factors are helping the pound sterling outperform the USD, EUR, and other major currencies.
The BoE took a more aggressive approach to increasing interest rates, which seems to be paying off. The British central bank has held interest rates steady at 5.25%. Notably, the Fed’s effective rate is also set at 5.25%-5.5%. This brings the interest rate differential between the currencies to 0. The GBP is trading at around $1.2, making it more attractive than the greenback for traders. Historically, the pound sterling has enjoyed the status of a safe haven, which might be the reason for strong investor confidence.
The relative economic resilience of the British economy is a primary support for GBP strength. The International Monetary Fund’s (IMF) May 2024 Staff Concluding Statement mentions that the UK economy is approaching a “soft landing.” A 0.6% Q-on-Q growth in the first quarter of 2024 is likely to steer the economy out of technical recession. The real GDP growth is forecasted to reach 0.7% by the year-end. This relative strength has built investor confidence in the currency.
Nominal wages in the country grew at a rate of 5.7% (including bonuses), through the first quarter. However, nominal wages do not account for inflation. Average real wages in the UK increased 2.1% YoY in Q1 2024, including bonuses. Faster wage growth, even as inflation eases, instils optimism among forex traders. However, traders must note that unemployment in the country is also rising, which may offset the benefits of wage growth for the economy and, hence, the pound.
Energy prices have sharply fallen since the country increased its oil and gas extraction from the North Sea. Plus, Ofgem may announce a 7% decline in energy costs from July. However, this will still be around 40% higher than the level before the crisis. A sharp decline in energy bills and the country’s attempts to build energy efficiency are expected to support economic growth.
The Ukraine-Russia war has severely affected trade flows in the Eurozone. Simultaneously, internal economic instability and fears of a recession in 2023 weighed down on the euro. This has drawn investors to the relatively stable GBP and pushed the Cable higher.
With impending rate cuts and elections in both the US and the UK, the GBPUSD is bound to remain volatile. This means forex traders will have no dearth of trading opportunities for this pair.
A great way to gain exposure to this pair is through CFD trading. This is because derivatives, such as CFDs, lower the entry barrier to the forex market, while allowing traders to speculate on both rising and falling forex prices. This means you will have the opportunity to take positions according to your speculations and simultaneously hedge them.
The first one to trim interest rates between the Fed and BoE will bear losses as the respective currency will decline. With CFD trading, traders can remain active in the GBPUSD market by tweaking their trading strategies and adjusting their positions according to the direction the pair moves in.
However, CFD trading amplifies both profit and loss potential due to leverage. Therefore, traders must adopt stringent risk management measures. Assess your risk appetite and take positions accordingly. Many experienced traders follow the 1% risk rule, which means not risking more than 1% of the value of your portfolio on a single position.
Forex trading via CFDs has gained popularity due to the multiple benefits it offers. However, before you start on your trading journey, here are some things to keep in mind.
Thorough research is crucial to effective forex trading. Keep an eye on the above factors to speculate on the pound sterling. Stay updated on the latest economic releases, geopolitical events and central bank policies impacting the GBP. Use technical analysis tools to identify entry, exit, stop-loss and take-profit levels.
If you’re new to CFD trading, begin with a demo account. Learn about the currency, factors affecting it, technical analysis, and experiment with different trading setups and styles. Maintain a journal to assess your strategy, refine your analyses, and identify your strengths and weaknesses. Enter the live markets once you’re confident.
This year has two main factors at play: interest rate policies and elections. Defining your entry and exit points, risk management parametres and overall trading goals in the context of the 2024 market landscape is a great way to capitalise on opportunities. Consider using technical analysis tools and fundamental analysis, informed by current events. Going ahead, you can refine your strategy according to the changes in the economic and political environments in the UK and US.
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