How does shorting the pound work?
Monetary units are traded relative to other monetary units. The short trading activity of the pound sterling against the United States dollar (USD) means that the trader is waiting for the price of the pound to fall against the United States dollar. An individual can realize (or acquire) the pound sterling because of financial differences – for example, because of different hopes relative to the economic capital of the states – or based on industrial trading strategies.
The short-term realization of monetary vaporization, such as GBP/USD (or in some cases popularly known as “cable”), means that pounds are traded and United States dollars are taken. These two procedures are performed if the trader takes the authorization for a short sale, using derivative products such as spread bets or CFDs. If the transaction is locked in, the difference in exchange rates between the two transactions establishes again.
Example of shorting the pound
Let’s assume that the GBP/USD pair is trading at 1.22075, the purchase price is 1.22080, and the sale price is 1.22070. You think that the pound sterling will lose in value against the US dollar, and therefore decided to sell (make a short position) GBP/USD at the price of 1.22070.
Selling one standard CFD on GBP/USD is equivalent to trading 100,000 pounds for $122,070. You have decided to sell three CFDs, which gives a total position size of $366,210 (£300,000). Your margin on this transaction is $12,194.79 (3.33% of the transaction value).
GBP/USD drops to 1.21420 and you close the position by buying three contracts at the new purchase price of 1.21425. Your profit will be $1935 ($366 210 – $364 275).
1,22070 (initial sale price of US dollars) * 3 (contracts) * 100,000 (units) – 1,21425 (purchase price of US dollars) * 3 (contracts) * 100,000 (units) = 1935 dollars.
What factors influence the price of the pound?
The exchange rate of the national currency is affected by how easily and freely it can be exchanged, as well as the supply and demand for it. This is determined by several factors, which in the case of the pound sterling include:
UK economic indicators and prospects
The economic performance and prospects of a country are mainly determined by its gross domestic product (GDP) – an indicator of the size and state of the country’s economy, which is usually measured over a quarter or year, as well as the consumer price index (CPI) and the producer price index (PPI) on a monthly and annual basis.
The CPI is an indicator of the average change over time in prices paid by urban consumers for a basket of consumer goods and services. The PPI measures the average change in prices received by domestic producers for goods and services sold on the domestic and/or export markets over a certain period.
UK interest rate expectations
Interest rates in the UK are set by the Bank of England. Interest rates play an important role in the fact that all other things being equal, the currency of a country with higher interest rates – or expected higher interest rates – tends to rise relative to the currencies of countries with lower interest rates.
This is because speculators and businessmen buy the currency of a country with higher interest rates and invest in it to get higher interest rates. This phenomenon is known as “carry trade”.
These factors determine whether businesses, speculators, and investors want to buy the pound sterling (demand) or sell it (supply). Investors and businesses compare these fundamentals across countries and, importantly, look at their future expectations before deciding which currency to invest in.
What are the most historic falls in the pound sterling?
Breaking into the Bank of England
In the early 1990s, the UK was forced to leave the European Exchange Rate Mechanism (ERM), and this day is now known as “Black Wednesday”. George Soros started shorting the pound sterling on the eve of this event, expecting that the UK would not be able to maintain the exchange rate of its currency in the strict trading ranges provided for by the ERM.
Soros believed that the pound was artificially supported by purchases by the British Treasury and that in the end, it would break down since the Treasury would not be able to continue buying forever. On September 16, 1992, the UK withdrew from the ERM, the Treasury stopped supporting the currency, and the pound sterling collapsed.
From September 10 to the December 1992 low, the GBP fell by more than 25%. George Soros allegedly made a profit of more than $ 1 billion on short trading in the pound.
In times of panic and mass unrest, funds flow, as a matter of principle, into the United States dollar, which stands out for its stability, as well as into haven currencies such as the Japanese unit and the Helvetic unit. Learn more about the most significant currencies in society.
The economic downturn of 2008 did not begin to recede in any way, and also the GBP/USD direction sold off rapidly, dropping approximately 35% from the 2008 high to the 2009 low. Already after the economic downturn ended, the GBP/USD pair returned a share of costs, rising 25% from the 2009 lows during the following 8 months.
How can I use shorting the pound to hedge my current risk?
Short views on the pound can be used as a money hedge against long positions in correlated currency units.
For example, if the GBP/USD pair is favorably correlated together with AUD/USD and NZD/USD pairs, and you own large views according to one or two of these sets, you can realize GBP/USD to function as a hedge. In case your large views will decrease, in this case, a short GBP/USD viewpoint can help you recover the losses.
The currency as well as the Helvetica unit, as well as the principle, are correlated together with the British pound. For this reason, in case you have big views according to these monetary units, you can analyze the chance of realization of the GBP index or GBP money evaporation.
The interdependence is based on the past value event and also does not necessarily show in the future correlation. For this reason, the use of GBP as a hedge may not always work as expected.
Where can I make a short sale of the pound sterling?
You can make short sales of the pound sterling using spread bets and CFDs using our Next Generation trading platform. We offer currency trading on many pairs based on the pound sterling, including GBP/USD, GBP/EUR, GBP/CAD, as well as our GBP index.
What are the trading hours of the pound sterling?
The pound is traded around the clock from Monday to Friday, from 9 pm on Sunday to 10 pm on Friday. This is because at any moment of the week, one of the major financial cities (London, New York, Sydney, Tokyo) is open and actively trading. Learn more about Forex market opening hours.
How can I open a short position on the pound sterling?
You can open a short position on the pound sterling using derivative products such as spread bets and CFDs, which involve speculation on the change in the price of the pound sterling. Open a real CFD account to register with us.
What are the costs associated with currency trading?
Currency trading does not require any upfront costs from us. The value of the transaction is taken into account in the spread, which is the difference between the purchase and sale prices indicated in the platform. Every evening, at 22.00, the retention cost can also be applied to currency positions. The cost of credit applied to the account is indicated in the order when opening a position, and its size depends on the difference in interest rates. The loan is credited if you open a long position in a currency with a higher interest rate than the one being sold (remember that with a short position in one currency in a pair, you buy another at the same time). The difference in interest rates is written off if there is a long currency with a lower interest rate in the pair. Check out the overview of our trading costs.