Trading Brexit and the pound – the good news bad news stories!

Novice traders are often confused by the market’s reaction to news events and bewildered as to why markets can rise on bad news yet fall on good, of which yesterday’s reaction in the British pound to the vote in the UK parliament is such an example. To recap Teresa May suffered the largest defeat ever by a sitting Prime Minister when Parliament overwhelmingly rejected her agreement with Brussels to bring about the UK’s break from the EU. However, for those traders not familiar with the intricacies of the UK/EU Brexit negotiations the motion that Members of Parliament were being asked to vote on does not lead to Brexit, but is merely a Withdrawal Agreement and Political Declaration to cover the transition period when any final deal is agreed.

For the British pound the Asia session saw cable rising gently to hit a high of 1.2902 before Europe and London entered and began to drive the pair lower as the time for the vote approached and cable spiked lower to 1.2667 as the extent of the Government’s loss became apparent. And it is at this point many traders would have assumed that given the scale of the loss, cable would continue lower but instead the pair surged higher triggering volatility candles in time frames up to and including the 8 hr chart. This surge saw the pair regain almost all of the earlier down move with cable closing at 1.2850 and posting a massive doji candle as a result.

And there are a number of reasons for such a dramatic reversal and these include the usual big operator and insider manipulations, but also the fact that whilst this was a shocking defeat for the UK government the financial markets have taken the view that Brexit is not likely to happen and the 2016 referendum result will not be implemented or a Brexit in name only and a return the status quo before the 2016 referendum.  To this, we should also add the increasing demand for a further referendum which its supporters claim would result in an overwhelming majority to remain in the EU.  And such a view is not as outrageous as it may seem as referenda results have been set aside in Europe in order to allow the populace to vote until the ‘correct’ outcome is achieved. In other words, the result required by Brussels and it is something that has happened on three occasions, once in Denmark and twice with Ireland.

Today’s price action on cable has continued higher with the pair touching an intraday high just shy of the 1.29 price point as the market awaits the next episode of the Brexit soap opera namely the result of the no-confidence motion being debated in Parliament which Teresa May is expected to win.

From a technical perspective cable must now break and hold above the 1.29 price point if the bullish move higher that began at the start of the year is to continue higher. Such a break would see cable move to test the volume point of control on the weekly chart which sits in the 1.3030 region. A failure to take out 1.29 would take cable back to test the 1.2780 congestion region which is where the vpoc currently sits on the daily chart.

And of course all this against the ongoing Brexit shambles which despite everything will continue to provide excellent trading opportunities provided we do not allow ourselves to assume or be taken in what appears on the surface to be ‘good’ or ‘bad’ news.

By Anna Coulling

Trading indicators from Quantum Trading