Watch for Profit Taking and Volatility in Sterling into the Elections

Next week election’s in the UK will most likely decide the direction of GBP in the long-term. As my colleague Ken Odeluga has written, one of four key scenarios will likely result from the December 12^th elections. But let’s take a look at price action and what could happen before the elections:

GBP/USD has broken out of its pennant/flag formation to the upside. The target of the pattern is near 1.3750. If the outcome is favorable to a Brexit deal, price may reach the target quickly. Currently, GBP/USD is holding horizontal resistance near 1.3175. RSI is overbought, although not as overbought as the previous high near 1.3000 back in October. In addition, price is close to the 50% retracement from the highs in April to the lows on September 3^rd.

Source: Tradingview, City Index

And GBP/USD isn’t just isn’t the only GBP pair that is looking bid. GBP/JPY has also broken out of its flag formation, is nearing overbought conditions on the RSI, and is trading above the 61.8 Fibonacci retracement level from its March high to the September 3^rd low.

Source: Tradingview, City Index

Several other GBP pairs are bid as well, such as GBP/AUD and GBP/CAD. Not only that, but EUR/GBP is putting 2.5-year lows.

But what could happen over the course of the next week heading into the UK elections? It’s December…. end of the year, and there is a single event that could possibly cause a 3 Standard Deviation move in the market (Some call them “Black Swan” events). This means that if the price moves an average price over x days, 99.7% of the data points will fall within 3 standard deviations of that average. In other words, it’s rare the market would move that much on any given day, but it could happen. (To give some perspective, the move of GBP/USD on the day of the Brexit vote was 15 Standard Deviations!!).

Large portfolio managers will be wrapping up trading soon for the year. Why risk trading hard earned profits during the last few weeks of the year and on a single event? Many people may close their books for the year ahead of the election to avoid the event risk. If that occurs, watch for two things in particular heading into election day:

1) Volatility: If people come in selling large size to get out of positions, GBP may pull back. Short term traders and high frequency algorithms may be ready to take the other side, causing volatility.

2) Low liquidity: More sellers than buyers is a recipe for a move lower.

And don’t limit the risk just to GBP. The same scenario can be said for stock indices, bonds, and commodities related to the UK. If one decides to trade around the election on December 12^th, if may be wize to stay away from anything GBP or UK related.

From time to time, StoneX Financial Pty Ltd (“we”, “our”) website may contain links to other sites and/or resources provided by third parties. These links and/or resources are provided for your information only and we have no control over the contents of those materials, and in no way endorse their content. Any analysis, opinion, commentary or research-based material on our website is for information and educational purposes only and is not, in any circumstances, intended to be an offer, recommendation or solicitation to buy or sell. You should always seek independent advice as to your suitability to speculate in any related markets and your ability to assume the associated risks, if you are at all unsure. No representation or warranty is made, express or implied, that the materials on our website are complete or accurate. We are not under any obligation to update any such material.

As such, we (and/or our associated companies) will not be responsible or liable for any loss or damage incurred by you or any third party arising out of, or in connection with, any use of the information on our website (other than with regards to any duty or liability that we are unable to limit or exclude by law or under the applicable regulatory system) and any such liability is hereby expressly disclaimed.

City Index is a trading name of StoneX Financial Pty Ltd.

The material provided herein is general in nature and does not take into account your objectives, financial situation or needs.

While every care has been taken in preparing this material, we do not provide any representation or warranty (express or implied) with respect to its completeness or accuracy. This is not an invitation or an offer to invest nor is it a recommendation to buy or sell investments.

StoneX recommends you to seek independent financial and legal advice before making any financial investment decision. Trading CFDs and FX on margin carries a higher level of risk, and may not be suitable for all investors. The possibility exists that you could lose more than your initial investment further CFD investors do not own or have any rights to the underlying assets.

It is important you consider our Financial Services Guide and Product Disclosure Statement (PDS) available at www.cityindex.com/en-au/terms-and-policies/, before deciding to acquire or hold our products. As a part of our market risk management, we may take the opposite side of your trade. Our Target Market Determination (TMD) is also available at www.cityindex.com/en-au/terms-and-policies/.

StoneX Financial Pty Ltd, Suite 28.01, 264 George Street, Sydney, NSW 2000 (ACN 141 774 727, AFSL 345646) is the CFD issuer and our products are traded off exchange.