How to Trade the GBP/AUD FX Pair: Insights & Strategies

The GBP/AUD currency pair could act as an interesting opportunity for forex traders, showcasing the economic relationships between the United Kingdom and Australia. This pair's movements reflect the underlying factors influencing these two major economies and can be used to gain insights into global currency trends.

GBP represents the Great British pound, the currency of the United Kingdom, which has a long history in international finance. AUD stands for the Australian dollar, which is known for its ties to commodities and natural resources and its role in the Asia-Pacific region.

In this Plus500 guide on trading the GBP/AUD currency pair, we'll explore its background and historical context, key factors affecting its exchange rate, and a range of effective trading strategies. We'll also look at the factors influencing this pair's price movements and risk management strategies for GBP/AUD.

Whether you're new to forex trading or have some experience, this guide aims to provide insights that can help you approach GBP/AUD trading with greater understanding and confidence.

Why Trade GBP/AUD

The GBP/AUD currency pair combines the Great British pound and the Australian dollar, both prominent in global trade. It's considered a minor pair since it doesn't include the U.S. dollar. As the quote currency, AUD indicates the amount of Australian dollars needed to purchase one pound at the current exchange rate. GBP also holds the fourth position in worldwide reserves, emphasising its significance.

Previously, GBP/AUD attracted carry traders due to the disparity in interest rates between the Bank of England (BoE) and the Reserve Bank of Australia (RBA). However, in recent times, these rates have converged considerably.

With GBP ranking fourth and AUD sixth in global trade, GBP/AUD offers moderate liquidity. Its notable volatility may make it appealing for swing trading strategies, however may not be suitable for all as it depends on your trading strategy.

Understanding the GBP/AUD Currency Pair

The GBP/AUD currency pair reflects the distinct trade patterns of the UK and Australia, with the UK primarily trading with the US and Europe, while Australia trades mostly with China and other Asian countries.

This divergence is particularly notable because the Australian dollar is closely tied to commodity trading and relies heavily on Asian markets.

As a result, fluctuations in US-China trade relations can impact both economies, leading to fluctuations in the GBP/AUD pair as the British pound reacts to changes in the stability of the USD amid challenges in the Chinese economy.

The History of the GBP

The British pound sterling (GBP) holds a significant place in global finance as the official currency of the United Kingdom and various British territories. Referred to colloquially as "quid" and symbolised by the pound sign (£), it remains one of the oldest actively traded currencies. London's status as a major financial hub further solidifies its prominence in the forex market.

Since its establishment as the official currency in 1707, the pound sterling has undergone notable shifts, including transitioning from the gold standard to a freely floating exchange rate in 1971. This shift allowed market forces to play a greater role in determining its value.

Brexit significantly impacted the pound sterling, leading to notable declines and subsequent fluctuations in its value. Recent economic policies, including tax cuts announced by at that time Prime Minister Liz Truss in September 2022, have further influenced the pound's performance, raising concerns about inflation and national debt.

History of AUD

The Australian dollar (AUD) emerged in 1966, supplanting the Australian pound as the official currency. Governed by the Reserve Bank of Australia, AUD's value is subject to market dynamics, transitioning to a free-floating status in 1983. Renowned as the "Aussie" in global currency exchanges, AUD's popularity stems from Australia's abundant natural resources, which include metals, coal, diamonds, meat, and wool.

What Influences the GBP/AUD Exchange Rate

The GBP/AUD exchange rate is influenced by a multitude of factors. Among these, the dynamics of supply and demand play a pivotal role in determining the value of the currencies involved. An increase in demand for a currency typically results in a rise in value, while an oversupply may lead to depreciation.

Several macroeconomic and geopolitical factors, including but not limited to monetary policy, price inflation, confidence and sentiment, economic growth, and the balance of payments, influence the demand for currency.

Monetary Policy

Monetary policy plays a crucial role in shaping the dynamics of the GBP/AUD currency pair. The Bank of England prioritises maintaining monetary stability, emphasising low inflation and currency confidence. When inflation levels pose a threat to the pound's stability, the BoE employs monetary policy tools to regulate inflation.

Similarly, the Reserve Bank of Australia contributes to the strength of the AUD through its conservative monetary policy approach. Unlike other major economies, including the U.S., European Central Bank, and the Bank of Japan, the RBA opted not to implement extensive economic stimulus measures post-Great Recession. This decision contributed to higher interest rates in Australia compared to those in other countries, consequently boosting the value of the AUD.

Interest Rates and Market Sentiment

Changes in interest rates can affect the value of the GBP/AUD currency pair. For instance, if Australia raises its interest rates, it attracts more foreign demand for the currency, which may increase demand for the AUD. As a result, this heightened demand could cause the AUD to appreciate against the GBP.

When trading GBP/AUD, it's essential to closely monitor the outlook for interest rates. Statements from officials at the Reserve Bank of Australia or Bank of England regarding interest rates can substantially impact the AUD's performance in currency markets.

GDP and Economic Performance

The GBP/AUD currency pair is also influenced by the Gross Domestic Product (GDP) of both the UK and Australia. As GDP reflects the overall economic performance, a rise in GDP indicates expansion, attracting traders to countries with high growth rates. Conversely, a drop in GDP signals economic decline, potentially leading to reduced currency demand.

Australia's commodity-based economy is vulnerable to adverse weather conditions, which can impact its growth and consequently affect the AUD. The drought during 2002-03 had a profound effect on agricultural activity, causing a 24.8 percent decline in farm GDP and subtracting 0.9 percentage points from overall GDP growth. This shows how environmental factors can influence economic performance and currency valuation.

Commodity Prices

Rising commodity prices typically strengthen the Australian economy and its currency, the AUD, while countries relying on manufactured goods often face inflation and currency depreciation. This trend affects the GBP/AUD pair as traders assess the relative strength of each currency.

Over the past decade, China's substantial economic growth has driven a surge in demand for Australian raw materials like coal and iron ore. Consequently, the increased demand for Chinese goods indirectly supports the value of the Australian dollar, as China exchanges its currency for AUD to purchase these raw materials. This interaction highlights the interconnectedness of global economies and their influence on currency pairs such as GBP/AUD.

Ways to Trade GBP/AUD

When considering ways to trade the GBP/AUD currency pair, one option is currency futures, which involve contracts to buy or sell a specific asset at a predetermined price on a future date. These futures specify both the price and the date for the exchange, offering traders a structured approach to currency trading.

Another avenue for trading GBP/AUD is through currency options, providing buyers the right, but not the obligation, to buy or sell the currency at a predetermined rate. Traders opt for currency options due to their capped downside risk; they may only lose the premium paid for the option. Despite their complexity, currency options offer traders the potential for considerable gains.

Additionally, forex Contracts for Difference (CFDs) present an alternative for trading GBP/AUD, offering flexibility and leverage without the obligation of owning the underlying asset.

Trading GBP/AUD Using CFDs

Trading GBP/AUD using CFDs allows traders to speculate on the fluctuation of the exchange rate between the British pound and the Australian dollar without owning the underlying currencies. When opening a CFD position, traders can choose to buy if they anticipate the GBP/AUD exchange rate to rise or sell if they predict a decline. The profit or loss in a CFD trade is determined by the difference between the closing price and the opening price of the contract.

CFDs are financial derivatives that enable traders to leverage their positions, amplifying potential gains or losses. By trading on margin, traders only need to deposit a fraction of the total contract value, making CFDs a leveraged product. This feature allows traders to open positions for smaller amounts than required in the physical market.

In the context of GBP/AUD trading, if a trader believes the British pound will strengthen against the Australian dollar, they can opt for a buy (or "go long") position. Conversely, if they anticipate the pound weakening relative to the Australian dollar, they can choose to sell (or "go short"). Profit or loss in CFD trading is influenced by each pip movement in the market, with gains or losses magnified by leverage.

Trading Strategies for GBP/AUD

When trading GBP/AUD through CFDs, various strategies leverage either fundamental or technical analysis for informed decision-making. These strategies capitalise on market trends and economic indicators to optimise trading outcomes.

Fundamental analysis examines economic indicators, geopolitical events, and societal shifts to gauge a currency's strength or weakness. On the other hand, technical analysis studies price movements to forecast future market directions. It applies to any asset with historical data, aiding in decision-making.

Numerous trading strategies utilise fundamental, technical analysis, or a combination of both. Among these are position trading and swing trading.

Position Trading

Position trading in GBP/AUD involves holding positions for extended periods, typically spanning weeks or months. Traders in this strategy primarily rely on fundamental analysis and economic data. However, they may also incorporate technical analysis when initiating new positions.

Fundamental analysis plays a pivotal role in position trading by evaluating macroeconomic indicators such as GDP, employment rates, and inflation. This method enables traders to assess the intrinsic value of the currency pair. By leveraging market trends and historical movements, position traders may anticipate future price movements in GBP/AUD.

Position traders, often termed 'trend followers,' capitalise on market trends and past behaviours to inform their trading decisions.

Swing Trading

Swing trading in GBP/AUD entails using technical analysis to identify market trends. By analysing past performance with chart tools, traders aim to predict price movements. The strategy revolves around timing market entries to capture and ride upward or downward waves.

GBP/AUD Trading Hours

GBP/AUD trading opportunities may always arise but tend to be at their peak during periods of heightened market activity, often aligned with the release of news and economic reports. During these times, both volume and volatility tend to increase, providing ample opportunities for traders.

However, it's worth noting that the trading hours on the Plus500 platform may not always align precisely with these key events.

Risk Management Tools for GBP/AUD

Risk management is paramount in forex CFD trading, especially given its rapid and volatile nature. Traders may utilise various risk management tools like Stop-Loss, Trailing Stop, Guaranteed Stop, and Take-Profit to mitigate potential losses. Furthermore, staying well-informed about market dynamics and events aids in effective risk management.

Risk-management tools provide avenues to minimise losses, yet they do not offer absolute protection. Therefore, it is imperative to trade only within your means and risk tolerance.

Conclusion: Mastering GBP/AUD Forex Trading Strategies

The GBP/AUD currency pair presents a unique blend of economic strengths, combining the influence of the Great British Pound and the Australian dollar. Throughout this article, we've covered the intricacies of trading GBP/AUD, from its historical significance to the factors shaping its exchange rate and effective trading strategies.

Understanding GBP/AUD trading can empower traders to make informed decisions and navigate the forex market with confidence.