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Strategy Video: Wading Back into Pound Trading Post-Brexit

Strategy Video: Wading Back into Pound Trading Post-Brexit

2016-06-29 00:41:00
John Kicklighter, Chief Strategist

Talking Points:

  • The Brexit vote caused unprecedented volatility for GBP/USD and the Pound last week
  • Trading through the vote was extremely risky and was unfit for any but those with the highest risk tolerance
  • Conditions are normalizing and Sterling trading is more reasonable, but caution is still necessary

See how retail traders are positioning in the majors using the SSI readings on DailyFX's sentiment page. Having trouble trading in the FX markets? This may be why.

Standing on the sidelines as the EU Referendum votes were counted was the risk-conscious trading approach last week. Yet, now after the outcome is known and the weekend anxiety has lifted, we can see the landscape of the market arise out of the fog. Venturing back into Pound trading can once again be guided by fundamental and technical analysis rather than waiting for an explosive headline to abruptly change direction and pace.

While the backdrop for Pound trading is more reasonable, it is still important to account for the market conditions we are dealing with and adapt to them. That should always be the case. Post-Brexit, the vote is known but the path of the technical withdrawal from the EU is still unclear. Furthermore, the separation of the world's fifth largest economy from its second largest aggregate economy undermines the perception of stability in the European Union and exacerbates a growing concern over the health of global risk appetite. It isn't surprising therefore that implied (expected) volatility for the Sterling remains very high and caution continues to override speculative reach.

Returning to the Pound under these considerations means accounting for volatility and the potential for sea change with reasonable stops and targets. Technical levels will carry less weight than under slower market conditions. Fundamentals will de-emphasize speculation over the potential over divergent monetary policy and instead orient towards the more elemental risk balance. For GBP/USD, the relief of implied volatility may offer the best source of bullish rebalance; but that does not guarantee timing or easier sentiment itself. GBP/JPY will not have to make a transition towards risk as it has always been the focus. EUR/GBP may remain among the most complicated fundamental pairings in the FX world. We discuss returning to Pound trading in today's Strategy Video.

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