3 Pound-Based Pairs, 2 Should Be Traded Now

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3 Pound-Based Pairs, 2 Should Be Traded Now

The Brexit Has The Pound On The Move

If there has been one thing moving the markets over the past two years that has grabbed my attention it is the Brexit. The Brexit is a monumental event for world politics, it is the succession of a major member-nation from the EU. Without doubt, the Brexit is going to have far-reaching implications for the English and that has been fueling a monster debate in Parliament. The debate centers on how the Brexit will occur and has boiled down to what people call The Irish Backstop. The Backstop, effectively, would tie the UK to the EU indefinitely despite a Brexit should there be no clear ending point for other key issues of the exit. The point is to keep Ireland’s border with the UK clear and open, something that might not be possible due to politics beyond my understanding.

The most recent events in the whole Brexit drama are the removal of Theresa May from her post as PM, the election of pro-Hard-Brexit Boris Johnson to PM, and the ensuing inability (and ongoing, lingering, never-ending) of Parliament to make a decision. Needless to say there is no end in sight. When it comes to the pound the dominate factor is that the PMs do not want a hard-Brexit and that is stiffening the Pound. The GBP/USD is one of the more bullish charts I’ve seen in forex for a while and shows an asset on the brink of full reversal. Now that one-month highs have been set above the baseline at 1.2900 it looks like a nice double-bottom formation is in process. This reversal is supported by both indicators so I see at least a near-term type rally unfolding over the next week or so, maybe more. It is possible next week’s FOMC meeting will send this pair shooting higher (maybe lower if the FOMC is less dovish than expected).

The GBP/JPY is in just about the same position, set up for a nice double-bottom reversal. The indicators here are even stronger so I see a decent rally/reversal brewing on this chart. A move higher may hit resistance at 134.00 and 136.00, a move above 136.00 would be very bullish.

The EUR/GBP is also set up for big move but it’s harder to see which direction this one will be. The chart is showing good support at the 0.8925 level but that may become a pivot point. The ECB is meeting this week and largely expected to ease policy and stimulate the economy. this move could weaken the euro and send the pair moving lower, if they don’t do as much as expected or if the moved is baked into prices the pair could move higher.

Forex is the largest and most liquid market, with trillions of dollars traded between millions of parties around the globe each day.   One of the first steps in understanding the market—which is also known as foreign exchange or currency trading—is to gain familiarity with some of the more commonly traded currencies. Here is a look at six major currencies, as well as the underlying traits and characteristics of each one.

1. The U.S. Dollar

The U.S. dollar, which is sometimes called the greenback, is first and foremost in the world of forex trading, as it is easily the most traded currency on the planet.   The U.S. dollar can be found in a currency pair with all of the other major currencies and often acts as the intermediary in triangular currency transactions. This is because the greenback acts as the unofficial global reserve currency, held by nearly every central bank and institutional investment entity in the world. 

In addition, due to the U.S. dollar’s global acceptance, it is used by some countries as an official currency, in lieu of a local currency, a practice known as dollarization.   The U.S. dollar also may be widely accepted in other nations, acting as an informal alternative form of payment, while those nations maintain their official local currency.

Key Takeaways

  • Forex trading is the world’s largest and most liquid market. 
  • The U.S. dollar, the euro, Japanese yen, Swiss franc, Canadian dollar, and British pound are actively traded currencies. 
  • The U.S. dollar is one side of many popular currency pairs and is also a reserve currency, making it first and foremost in the world of currency trading. 
  • Economic trends in the U.K. are often captured by movements in the British pound, while the euro is the currency of the eurozone.
  • The Japanese yen is the most active of the Asian currencies, due partly to the popularity of the carry trade. 

The U.S. dollar is also an important factor in the foreign exchange rate market for other currencies, where it may act as a benchmark or target rate for countries that choose to fix or peg their currencies to the dollar’s value. China, for instance, has long had its currency, the yuan or renminbi, pegged to the dollar, much to the disagreement of many economists and central bankers.   Quite often, countries will fix their currencies to the U.S. dollar to stabilize their exchange rates rather than allowing the free (forex) markets to drive the currency’s relative value.

One other feature of the U.S. dollar is that it is used as the standard currency for most commodities, such as crude oil and precious metals. Thus, these commodities are subject not only to fluctuations in value due to the basic economic principals of supply and demand but also to the relative value of the U.S. dollar, with prices highly sensitive to inflation and U.S. interest rates, which can affect the dollar’s value. 

2. The Euro

The euro has become the second most traded currency behind the U.S. dollar.   The official currency of the majority of the nations within the eurozone, the euro was introduced to the world markets on Jan. 1, 1999, with banknotes and coinage entering circulation three years later. 

Along with being the official currency for most eurozone countries, many nations within Europe and Africa peg their currencies to the euro, for much the same reason that currencies are pegged to the U.S. dollar—to stabilize the exchange rate. As a result, the euro is also the world’s second-largest reserve currency. 

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With the euro being a widely used and trusted currency, it is prevalent in the forex market and adds liquidity to any currency pair it trades with. The euro is commonly traded by speculators as a play on the general health of the eurozone and its member nations. Political events within the eurozone can also lead to large trading volumes in the euro, especially in relation to nations that saw their local interest rates fall dramatically at the time of the euro’s inception, notably Italy, Greece, Spain, and Portugal.     The euro may be the most “politicized” currency actively traded in the forex market.

3. The Japanese Yen

The Japanese yen is easily the most traded of Asian currencies and viewed by many as a proxy for the underlying strength of Japan’s manufacturing and export-driven economy. As Japan’s economy goes, so goes the yen (in some respects). Forex traders also watch the yen to gauge the overall health of the Pan-Pacific region as well, taking economies such as South Korea, Singapore, and Thailand into consideration, as those currencies are traded far less in the global forex markets. 

The yen is also well known in forex circles for its role in the carry trade (seeking to profit from the difference in interest rates between two currencies). The strategy involves borrowing the yen at next to no cost (due to low-interest rates) and using the borrowed money to invest in other higher-yielding currencies around the world, pocketing the rate differentials in the process. 

With the carry trade being such a large part of the yen’s presence on the international stage, the constant borrowing of the Japanese currency has made appreciation a difficult task. Though the yen still trades with the same fundamentals as any other currency, its relationship to international interest rates, especially with the more heavily traded currencies such as the U.S. dollar and the euro, is a large determinant of the yen’s value. 

4. The Great British Pound

The Great British pound, also known as the pound sterling, is the fourth most traded currency in the forex market.   Although the U.K. was an official member of the European Union, the country never adopted the euro as its official currency for a variety of reasons, namely historic pride in the pound and maintaining control of domestic interest rates.   As a result, the pound is sometimes viewed as a pure play on the United Kingdom.

Forex traders will often estimate the value of the British pound based on the overall strength of the British economy and political stability of its government. Due to its high value relative to its peers, the pound is also an important currency benchmark for many nations and represents a very liquid component in the forex market. The British pound also acts as a large reserve currency due to its historically high relative value compared to other global currencies. 

5. The Canadian Dollar

Also known as the loonie, the Canadian dollar is probably the world’s foremost commodity currency, meaning that it often moves in step with the commodities markets—notably crude oil, precious metals, and minerals. With Canada being such a large exporter of such commodities, the loonie often reacts to movements in underlying commodities prices, especially that of crude oil.   Traders often trade the Canadian dollar to speculate on the movements of commodities or to hedge positions in the commodities market. 

Being located in close proximity to the world’s largest consumer base—the United States—the Canadian economy and the Canadian dollar are highly correlated to the U.S. economy and movements in the U.S. dollar as well. 

6. The Swiss Franc

Last is the Swiss franc, which, much like Switzerland, is viewed by many as a “neutral” currency. More accurately, the Swiss franc is considered a safe haven within the forex market, primarily due to the fact that the franc tends to move differently than more volatile commodity currencies, such as the Canadian and Australian dollars.     The Swiss National Bank has actually been known to be quite active in the forex market to ensure that the franc trades within a relatively tight range, to reduce volatility, and to keep interest rates in check. 

EUR/GBP

EUR/GBP Couldn’t Even Put Up A Retrace

The Bearish Trend Continues for EUR/GBP, As It Returns Below the 20 SMA Again

EUR/GBP Reverses at the 50 SMA Again

EUR/GBP Continues the Decline, As the GBP Climbs Higher

Long on EUR/GBP at the 100 SMA

EUR/GBP Heading for the 100 SMA

EUR/GBP Retraces Nearly 300 Pips Lower, But Stops at the 50 SMA

About the EUR/GBP (EURO & Great British Pound)

The EUR/GBP pair is the abbreviated term used for the Euro & Great British Pound. the Euro and Great British Pound the, nicknamed as “Chunnel” Before we get into the particulars, what exactly does EUR/GBP rate mean? The exchange rate tells you how many EURO (the quote currency) are required to purchase one Pound (base currency). For example, if the pair is trading at 1.17, it means it takes 1.17 euros to buy 1 Pound`

Breaking Down ‘EUR/GBP’

The euro (€; EUR) is the official currency of 19 of the 28 member states of the European Union. The euro is the second largest and second most traded currency in the foreign exchange market after the United States dollar. The euro is divided into 100 cents.

the Euro vs. the British Pound. This pair describes a cross among the two biggest economies in Europe, the Euro Zone and the United Kingdom. The pair is greatly less volatile than other Euro or Pound based crosses because of the economic closeness and relationship between the two. Changes in monetary policy between the Bank of England and the European Central Bank can make this pair extremely sensitive.

What Determines the EUR/GBP Exchange Rate?

Several factors can impact the EUR/GBP rate valuation, including:

ECB & BOE Monetary Policies: The European Central Bank and the Bank of England control the supply of money in the market, to keep the economy on track. A dovish policy, which is also known as expansionary policy, from either of the central banks, weakens the related currency. In contrast, a hawkish monetary policy (contractionary policy) strengthens the currency.

Economic Events: The movement in the European and England economic events determine the exchange rates. Top of the line economic events includes GDP, Employment Change, Industrial Production, and Consumer Price Index. Better than forecast data increases the demand for related currency and impacts the value of either the Euro or the Great British Pound, causing fluctuations in the EUR/GBP exchange rate.

Currency Correlations

Correlation is merely a mutual relationship or connection between two or more things.

Positive correlation – The positive relationship merely is when pairs move in tandem with each other.

In the forex world, the GPB/SGD, GBP/AUD, and GBP/CAD currency pairs are positively correlated. It’s because all these pairs have a Great British Pound in the numerator. So, any change in the Chunnel will be reflected in these pairs.

Negative correlation – In contrast, a negative relationship is when forex pairs move in the opposite direction. For example, GPB/SGD, GBP/AUD, GBP GPB/CAD pairs share a negative correlation.

The euro is one of the most important alternatives to the U.S. dollar among fiat currencies this is why there is often a positive link between the euro and gold: both assets are negatively correlated with the greenback.

The United Kingdom is an oil producer Production. In 2008, the UK was the 14th largest oil and gas producer in the world (10th largest gas producer and 19th largest oil producer) In 2008, the combined production of oil and gas was 1 billion BOE (549 million barrels (87,300,000 m3) of oil and 68 billion cubic meters of gas).

EUR/GBP Specifications

The EUR/GBP is traded in amounts denominated in the US Dollar.

Standard lot Size: 100,000
Mini lot size: 10,000
One pip in decimals 0.0001
Pip Value: $13.05

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