Sunday September 18, 2016 - 12:17:50 GMT
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Why the GBPUSD Plunged on Friday
The dollar ended the week sharply higher in a forex market that remains highly sensitive to news headlines. As is generally the case, it is the reaction to news that is more important than the news itself. This was the case again on Friday when the dollar firmed following an above consensus US August CPI report and never looked back. A big loser on the day was sterling and its weak showing, as I will explain below, may have to do with more than just the news.
A look at the weekly chart below shows the price action since the shocking June 23 vote to Brexit from the EU. Over this period most of the trading has been above 1.30 with only two weekly closes below this pivotal level. On the upside, there has only been one day where the GBPUSD traded above the key 1.35 level and one day below 1.28. The range over this period has been 1. 2798 (July 6 low) and 1.3533 (June 29 high). The highest trade since the beginning of July was set just last week on September 6 at 1.3444. The low on Friday, September 16, was 1.30.
As this chart shows, most of the trading has been between 1.30-1.34 with only 12 out of the 61 trading days since the vote to Brexit seeing a low below 1.30 (5 days in a row in early July and 7 days in a row in mid-August. This is why Friday’s low at 1.30 is important as it will set the tone not only for the coming week but in general.
Why did GBPUSD plunge?
The key word is positioning. It is easy to explain with hindsight the price action in a currency (or any market for that matter) based on what news came out that day. In the case of the GBP, it was already under some selling pressure out of the GBPJPY cross on Friday before the US CPI news came out but it was likely positioning or lack of that made it hard for the market to absorb fresh selling (or liquidation) in this currency. A look at the weekly chart and the price action since mid-August suggest that the market was not nearly as short (or some might even be long) as might otherwise have been the case. My partner, John Bland, often describes a currency as moving up a staircase and down an elevator. This is how sterling traded on Friday as the currency plunged in a market not in a position to take in fresh selling on a thin Friday.
So where is the GBPUSD headed?
In this regard, we have created a tracking poll asking, Where will the British pound trade vs. the US dollar? In appreciation for participating, you will receive our exclusive report, How to Use Crosses to Trade Spot FX, a must read in a trading world where cross currency flows more often than not drive the spot market
Click to participate in our poll GBP/USD poll
Jay Meisler, founder
Global Traders Association
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