Gonçalo Moreira, CMT
Independent Analyst
Brexit on focus...
Looking at the 12-month performance comparative chart above, the GBP/USD has been a standout underperformer versus other major pairings. But how many traders have installed a short position pre-Brexit and are still riding on profits? Probably few, despite having had the chance. We advised on the magnitude of the event on several occasions:
- GBP/USD Forecast 2016. 'Brexit fears could weigh over Sterling' – Omkar Godbole, FXStreet | Dec 23 2015
- 'There's potential for a British Pound collapse in 2016' – Martin Armstrong, FXStreet Interview | Jan 04 2016
- GBP/USD Forecast 2017: Expect yet another murky year for Cable – Haresh Menghani, FXStreet | Dec 22 2016
Today, as many experts highlight, Brexit and the Article 50 triggering is a market mover for the Pound:
- 'The Article 50 is triggered; the UK has officially sent its demand to leave the European Union [...]' - Ipek Ozkardeskaya
- 'Traders are nervous about today’s Article 50 triggering that inspired recent strong sell-off (cable is down around 1.5% from Tuesday’s opening until now)' - Slobodan Drvenica
- 'Sentiment remains firmly bearish towards the Pound moving forward and the potential resurgence of hard Brexit fears could ensure price weakness becomes a recurrent theme' - Lukman Otunuga
As far as the near-term outlook is concerned, though, I would like to withdraw your attention –just for a moment– from the high profile news from the UK or Eurozone regarding the Brexit negotiations, and reassess where the Cable stands in terms of price action and structure.
... but there is another way to look at the price behavior
Correlation studies confirm the decoupling of the GBP with other core currencies on a long-term basis, in line with the above performance comparative. Only the CAD shows less sympathy than the GBP in aligning with its peers.
Zooming in on a daily basis, the same studies suggest the GBP is not that reluctant to follow other FX pairs.
The message is clear: as enticing at it may look to adhere to this price erosion –which by the way is not a Brexit result; the GBPUSD has been printing lower highs since the 60s– there is much more to extract from this pair if you pay attention to the interconnectedness of all FX pairs and their fractal similarities.
A Correlation coefficient shows how the GBP/USD is at times at the mercy of EUR moves, as it may be reacting to JPY or USD flows. Right now, studies show the JPY and USD are the ones dictating the structure. Notice the high correlations to some pairs: 80% positive correlated to the EURUSD, 96% and 93% negative to the USDJPY and USD/CHF respectively. Should have been the Sterling the one shaking the tree in the FX arena, we would see a higher correlation to other GBP pairs, which is not the case. EUR/GBP and GBP/JPY are 54% and 37% negatively correlated, which explains the case.
I recommend you to bookmark FXStreet's Correlations page for your future reference. It will help you to detect the relationships between currencies and understand the big picture.
Note: All information on this page is subject to change. The use of this website constitutes acceptance of our user agreement. Please read our privacy policy and legal disclaimer. Opinions expressed at FXstreet.com are those of the individual authors and do not necessarily represent the opinion of FXstreet.com or its management. Risk Disclosure: Trading foreign exchange on margin carries a high level of risk, and may not be suitable for all investors. The high degree of leverage can work against you as well as for you. Before deciding to invest in foreign exchange you should carefully consider your investment objectives, level of experience, and risk appetite. The possibility exists that you could sustain a loss of some or all of your initial investment and therefore you should not invest money that you cannot afford to lose. You should be aware of all the risks associated with foreign exchange trading, and seek advice from an independent financial advisor if you have any doubts.
Recommended Content
Editors’ Picks
AUD/USD: The hunt for the 0.7000 hurdle
AUD/USD quickly left behind Wednesday’s strong pullback and rose markedly past the 0.6900 barrier on Thursday, boosted by news of fresh stimulus in China as well as renewed weakness in the US Dollar.
EUR/USD refocuses its attention to 1.1200 and above
Rising appetite for the risk-associated assets, the offered stance in the Greenback and Chinese stimulus all contributed to the resurgence of the upside momentum in EUR/USD, which managed to retest the 1.1190 zone on Thursday.
Gold holding at higher ground at around $2,670
Gold breaks to new high of $2,673 on Thursday. Falling interest rates globally, intensifying geopolitical conflicts and heightened Fed easing bets are the main factors.
Ethena Labs launches new UStb stablecoin backed by BlackRock's BUIDL token
Ethena Labs announced on Thursday that it has released a new stablecoin product, UStb. The new stablecoin will be fully collateralized by BlackRock's USD Institutional Digital Liquidity Fund and function similarly to a traditional stablecoin.
RBA widely expected to keep key interest rate unchanged amid persisting price pressures
The Reserve Bank of Australia is likely to continue bucking the trend adopted by major central banks of the dovish policy pivot, opting to maintain the policy for the seventh consecutive meeting on Tuesday.
Five best Forex brokers in 2024
VERIFIED Choosing the best Forex broker in 2024 requires careful consideration of certain essential factors. With the wide array of options available, it is crucial to find a broker that aligns with your trading style, experience level, and financial goals.