Much as expected the recent bullish trend for Cable came to a shuddering halt on Friday, with the GBP/USD selling off sharply and wiping out much of the gain of the last two weeks. This was in sharp contrast to the EUR/USD which continues to rise as the short squeeze for euro bears continues. The question therefore is why such a dramatic move, and one which was certainly not US dollar driven. After all the dollar index continued lower for a third consecutive week, with only a modest move higher on Friday and aligned to the price action for the EUR/USD.
And for forex traders, this is one of the key aspects which makes trading currencies so fascinating and also challenging at times. And the answer for Cable lies in the forthcoming election in the UK, which takes place on Thursday. The outcome is far from certain, and indeed looks set to be a rerun of five years ago with a coalition of some description now seen to be increasingly likely. However, the difference this time around is the collapse of the Labor vote in Scotland with the SNP now looking for a whitewash with no Labor MP’s returned. As a consequence this in turn has raised the prospect of a coalition between Labor and the SNP, something which the Labor party have refused to consider (or at least publicly), thereby adding a further layers of confusion and doubt to the final outcome, something financial markets find worrying. Indecision is not welcome, and with virtually all the opinion polls now suggesting a hung parliament at best, and with a rainbow coalition at worst, this is not considered to be good news for the British pound. In the run up to the previous election in 2010, Cable sold off heavily closing May over 600 pips lower moving from the open of 1.5316 to close at 1.4541, before recovering over the next two months to move above May’s open.
Whilst the politics are certainly driving the pair at present, the technical picture was also signalling weakness ahead, not least with the depth of resistance overhead in the 1.5550 region. This level was ultimately not achieved, and the resistance, which was reinforced with a pivot high following Thursday’s price action was also accompanied with high volume thereby further highlighting a potential reversal.
However, what is interesting here is the volume associated with Friday’s price action, and indeed in much the same way as with the Aussie dollar where we saw a big move on average volume, here again we witnessed a dramatic move but associated with modest volume. This in turn suggests a degree of spoofing, and it would be no surprise to see this market bounce higher again over the next few days with further volatility ahead of election day itself. Some of this volatility will, no doubt be driven by the opinion polls which are now reaching fever pitch, and some by the market makers who must be salivating at the prospect of the money to be made next week. However, for a more considered and rational view, to the left of the chart the currency strength indicator gave us a clear heads up on the short term direction, with the US dollar (the red line) heavily oversold and the British pound ( the yellow line) heavily overbought. Both reversed on Friday with the GBP the most dramatic and falling sharply on the 480m timeframe.
So some interesting times ahead next week for traders of the British pound, and one where an intraday scalping approach is likely to pay handsome rewards. Smash and grab will be the order of the day as fast and furious price action is likely to prevail. It will also pay forex traders to consider the cross currency pairs in particular the EUR/GBP and the GBP/JPY, and whilst spreads here will be wider requiring marginally longer trading periods, nevertheless volatility will abound and offer multiple trading opportunities as a result. As always, the motto is, trade what you see and not what you think.
By Anna Coulling