More specifically, it refers to the current value of the British Pound relative to the Canadian Dollar. The UK, as a crucial centre of global finance and one of the world’s largest economies, has a currency that is hugely important and that all investors should understand.
Meanwhile, Canada is one of the world’s largest commodities exporters, as well as the wealthy northern neighbour of the world’s economic superpower – the United States of America. These factors are exactly what makes trading GBP/CAD on global forex markets so interesting. Read on to find out everything you need to know about GBP/CAD forex trading.
What is GBP/CAD Forex Trading?
Forex trading is one of the most common, widespread, and lucrative financial activities in the whole world, with trillions of dollars worth of currency trades executed every single day. Put simply, forex trading is the act of trading one currency for another in the hope of making a profit from any price changes between the value of these currencies.
It can also denote any act that involves speculating on the value of a currency relative to another, for example by trading forex CFDs. Generally, the objective of a forex trader is to capitalize on short-term price fluctuations within a currency pair, by buying and selling at the right time to make a profit.
For example, one might purchase GBP in the hope that its value against CAD will rise later in the day, selling when and if this price change does occur. If GBP/CAD is trading at 1.75, it means that it costs $1.75CAD to purchase a single British Pound on the global forex market. The aim is to buy and sell at the right moment to capitalise on the changes and volatility of this important currency pair.
History of the GBP/CAD Forex Pair
The British Pound has existed in many forms throughout its long history, with the current decimalised version coming into being in 1971. Before this, the Pound had enjoyed a thousand-year history as the currency of the British Isles, making it one of the oldest continuously existing currencies on the planet. Owing to the vast reach of the British Empire, the Pound has, at times, been the singular currency of world trade, the currency in which the majority of foreign debt was held, and the globe’s de facto reserve currency.
Today, the Pound is a free-floating currency that ranks as one of the most valuable on Earth, as well as the world’s fourth most widely-held reserve currency, underscoring the continued importance of the UK to the world economy.
The Canadian Dollar, also known as the “loonie”, is the official and only currency of Canada. Given that Canada was once a part of the British Empire, it too used the Pound Sterling as its currency for more than 100 years. In 1850, it was decided that it would be more appropriate to have a currency pegged to the US Dollar, given the proximity of Canada to the USA. As such, the CAD was slowly introduced in all Canadian provinces and has remained unchanged since then, despite unpegging from the US Dollar after the collapse of Bretton Woods in 1971. Today, the loonie is the world’s sixth most widely-held reserve currency, and GBP/CAD is a hugely popular and important currency pair.
There are many reasons why investors opt to trade GBP/CAD, such as:
- Substantial volatility without excessive risk, as both currencies are strongly influenced by global macro-events while still retaining significant stability.
- Strong correlation with commodity market trends, allowing for easier prediction.
- Decent levels of liquidity, owing to the strong demand for Pounds and loonies on the global market.
- Convenient trading hours, especially for UK forex traders.
Factors that Influence GBP/CAD
Myriad factors will generally influence the price of GBP/CAD, such as:
- Canadian and British Monetary Policy: any major policy announcements from either the Bank of Canada (Banque du Canada) or the Bank of England will immediately impact the value of GBP/CAD.
- Price movements in select commodity markets: Canada’s economy is inextricably tied to exports of commodities such as gold and oil, which influence the value of its currency.
- Domestic economic developments: any major economic developments in either the UK or Canada will typically affect the GBP/CAD.
- US economy news: Canada is the USA’s closest neighbour and the UK is the USA’s biggest trading partner, so any US economic news will quickly be reflected in GBP/CAD.
The Role of the GBP
The GBP is one of the most respected, in-demand, and expensive currencies in the world and its importance to investors simply cannot be overstated. What’s more, the City of London is the command centre of the global financial industry, as well as the place where almost half of all daily global forex trades take place. Increased attention has been paid to the GBP in the aftermath of Brexit, which has dramatically increased the GBP’s volatility and made it much more interesting to trade.
The Role of the CAD
The loonie is a free-floating currency that is used by one of the most stable, wealthy, prosperous, and globalized nations on the planet. It is also the currency of the USA’s neighbour and is therefore closely connected to the fate of the US in almost every aspect. What’s more, as Canada’s economy is largely based on the export of key commodities such as oil, wood and gold, any movement in these markets will affect the value of the Canadian dollar against other major currencies.
Strategies on forex trading GBP/CAD
When trading GBP/CAD on global currency markets, it is essential to have a strategy in place if you want to succeed and make a profit. Here are some tips to keep in mind with GBP/CAD forex trading:
- Always have a rigid exit strategy and stop-loss in place to ensure that you can cut your losses and get out if you need to.
- Always pay attention to market fundamentals and base your trades on informed decisions based on actual market research.
- Use a trusted GBP/CAD online forex broker that holds a valid license for the country you are resident in.
- Focus on trades in small time periods (day trading), as price movements in GBP/CAD tend to be modest.
When to Buy or Sell GBP/CAD
GBP/CAD is a minor currency pair, meaning there will be less liquidity than you will get with major pairs such as USD/EUR. Therefore, it is advisable to only trade GBP/CAD during peak market hours, when you are much more likely to get the liquidity you need to execute trades when you want. This is during London market hours, or between the hours of 8 am and 4 pm GMT.
Let’s briefly walk through a hypothetical GBP/CAD trade to better understand the best times to buy and sell.
If you believe that UK employment data that is due to be released will show positive news for the UK economy (especially compared to the Canadian labour market), then you would hit BUY on GBP/CAD, as you are hoping that the value of the GBP will rise relative to the CAD in the near future. Conversely, if you believe that Canadian export data is about to show strong recovery, then you might want to hit SELL on GBP/CAD, as the value of the GBP relative to the CAD may fall.
How to Trade GBP/CAD
Although GBP/CAD is technically a minor currency pair, it remains one of the most important and widely followed on Earth. This means that you should generally expect liquidity when you need it, as well as an abundance of educational resources to help you assess when to make your trades. As long as you have a trusted and licensed forex broker, you can immediately begin trading GBP/CAD, no matter where you are.
Profiting from trading GBP/CAD requires patience, skill, market knowledge, and finesse. As mentioned, GBP/CAD is strongly correlated with other select markets, so you should always monitor these markets before buying and selling. Gold, oil, and timber markets are a good place to start, as are the markets for related currency pairs such as USD/CAD and GBP/EUR.
Close Your Position to Take a Profit or Cut a Loss
Trading GBP/CAD means capitalizing on tiny price movements throughout the day, a strategy known as day trading. When doing this, there is always the risk that a single major movement in any direction can wipe out an entire day’s worth of gains. Therefore, always put a stop-loss on your account so that you can automatically cut your losses and get out if GBP/CAD falls above or below a certain level.
Choose a Broker & Open an Account
When trading a major currency pair such as GBP/CAD, choosing a trusted and licensed broker is essential.
A quality broker will work with expert data and resources to help you make informed trades. They will offer direct market access to allow you to buy and sell at exactly the moment that you want to.
They will hold valid licenses from trusted financial regulatory bodies, to guarantee the safety of your money. To find out which brokers offer all of these crucial elements, make sure to check out our reviews of trusted forex brokers today.
GBP/CAD Trading Risks
It is also important to bear in mind that trading GBP/CAD comes with several risks and drawbacks that you will need to incorporate into your strategy:
- Potential illiquidity: as mentioned, GBP/CAD can sometimes suffer from less liquidity than with other pairs, making it harder to time your buy and sell orders.
- Expensive to trade: as a minor pair with occasional liquidity problems, trading GBP/CAD can be expensive.
- Sudden volatility: although the CAD is broadly stable, the GBP can swing dramatically in response to surprise economic news, adding a layer of unpredictability.
Trading the Pound-Loonie has held broad appeal to both beginner forex traders and institutional investors alike for a long time. GBP/CAD reflects two of the most important, exciting, and dynamic economies in the world. With the right trading resources and insights at your disposal, GBP/CAD forex trading can be an incredibly rewarding pursuit.