The trading of currency in the Foreign Exchange (Forex) markets usually takes place in pairs. The notations of the currencies in a single pair indicate the price at which the currencies can be traded in the market. The ABC / XYZ format is used to represent the notion of the Forex Pairs. In this symbolization, ABC denotes the currency of one country, whereas XYZ denotes the currency of a different country.
A single currency can never be traded by itself. For example, in order to trade the British Pound, it has to be compared with the currency of another country such as United States Dollars. This process is the basis of the Forex Trading Market.
The abbreviation GBP / USD stands for the currency pair of British Pound and U.S. Dollars. A currency pair explains to the trader that how many units of U. S. Dollars are required in order to purchase one unit of the British Point. In the forex pair of British Pound and U.S. Dollars, British pound is the base currency whereas U.S. Dollars is the quote currency.
The trading of the GBP / USD currency pair in the foreign exchange market is also referred to as ‘Cable’. The value of this particular currency pair is quotes as One British Pound for X amount for U.S. Dollars. For instance, if the value of this pair of currency is 1.40 at a particular time, it means that in order to buy 1 unit of British Pound, one has to sell 1.4 U.S. Dollars.
The GBP / USD currency pair is affect by various factors which influence the value or either British Pound or U.S. Dollars or both. This effect of value can either be in respect of each other or in relation to other currencies as well. For instance, the difference between the interest rate of Bank of England and the Federal Reserve will have a direct impact on the value of both these currencies on being exchanged with each other. For example, when the Federal Reserve intervenes in the activities of the open market in order to increase the value of U.S. Dollars, then the value of GBP / USD pair can deteriorate as the U.S. dollar will be strengthened in comparison the British Pound.
The GBP / USD pair has a negative correlation with USD / CHF pair. On the other hand, it has a positive correlation with EUR / USD currency pair. This happens because of the positive correlation between Swiss Franc, British Pound and Euro.
For example, if one predicts that the economy of Britain would grow continuously and it will be the leader amongst the economies of all G7 nations in respect of its growth, then the rate of GBP / USD pair would go up. However, if suppose one predicts that British economy is about to commit itself to adoption of Euro, then the value would go down. Thus, if one foresees the value British Pound falling in the future, one would sell the pair for U.S. Dollars and vice versa.