Trading Basics
Cable
Another name for the GBP – USD exchange.
Around half a trillion dollars is traded between the two currencies everyday, making it the third most popular currency pair to trade in behind EUR – USD and USD – JPY.
What is Cable?
Even if you’re new to the world of Forex trading, chances are that you’ve already heard the nicknames of a few major currencies.
The US dollar is often called the greenback, the euro is the single currency, and the Australian dollar is the Aussie. But what about currency pairs? Do they also have nicknames? Some of them do, at least the GBP/USD pair. It’s called the cable.
Why is GBP/USD Called Cable?
Cable is a slang term used by Forex traders to refer to the British pound vs US dollar exchange rate.
The term dates back to the mid-19th century when the GBP/USD exchange rate was transmitted across the Atlantic Ocean using a large cable that ran across the ocean floor between the United Kingdom and the United States.
Nowadays, foreign exchange traders don’t use a transatlantic cable anymore, but the term cable exchange rate continues to refer to the US dollar and British pound exchange rate. The Bank of England, which was a privately-owned central bank by stockholders in the 19th century, issued banknotes tied to official gold reserves at that time.
The British Pound and Macro-Releases
The British pound sterling vs US dollar exchange rate tends to be largely impacted by current macro-releases from both countries.
In a research of currency correlations, the British pound has shown to have the largest correlation to domestic macro-reports among all major European currencies.
This means that when a number from the UK comes in better than expected, the British pound tends to appreciate.
Similarly, numbers that miss market expectations cause the British pound to depreciate.
While this concept also applies to other currencies, the British pound shows the strongest relationship between macro-releases and price movements. Traders can take advantage of this information by utilising a straddle strategy on the GBP/USD pair to trade on the UK and US releases.
The Cable Currency and the Euro
The British pound vs US dollar pair exhibits a pretty strong correlation with the Euro vs US dollar pair.
The following table, which calculates correlation coefficients of currency pairs from November 2012 to September 2018, shows a positive correlation of 0.7079 between the GBP/USD and EUR/USD pair.
Many traders use the GBP/USD pair as a leading indicator of the EUR/USD pair.
Most of the time, the EUR/USD pair will closely follow any price-move of GBP/USD in the very short-term, which makes the pair a great tool for breakout traders and day traders.
For example, if the EUR/USD is close to a breakout to the upside or downside, a quick glance on the GBP/USD may provide valuable insight into when and in which direction the price may break out.
Conclusion
The British pound vs US dollar pair is one of the most actively traded currency pairs in the foreign exchange market.
In the mid-19th century, a large transatlantic cable that ran across the ocean floor of the Atlantic Ocean was used to transmit the GBP/USD exchange rate between the United Kingdom and the United States.
Since then, the GBP/USD pair is often referred to as the cable.
Macro-releases from the United Kingdom and the United States tend to have a very large impact on the pair, with the British pound exhibiting the largest correlation with domestic macro-releases among all major European currencies.
Also, traders often use the GBP/USD pair as a leading indicator of future EUR/USD exchange rate movements.
Other Trading Basics
Credit Account
For those with excellent credit some brokers will provide a credit account. This means the trader puts up less margin.
Arbirtage
Simultaneously buying and selling a security at two different prices in two different markets, with the aim of making a profit without the risk of prices fluctuating.
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