Living in the now

Opinion, Sentiment or fact?

In the coming week, the Bank of England will meet to decide on Monetary Policy. This meeting is eagerly awaited by traders who see it as pivotal to the short/medium term fate of the pound since there is high expectation that they will raise interest rates for the first time in over a decade year.

In the grand scheme does it really matter if they hike or not? FX trading is more about opinion than fact. The guys (or gals) who trade medium term (four-hour charts and above) using all means at their disposal, will have looked at those charts and decided based on their opinion about what will happen, and positioned themselves accordingly.  

So, what will be the outcome of the Central Bank’s actions? If they hike will the pound rally? It ought to as it will mean that the interest rate differential will widen between the pound and the common currency and will narrow against the dollar where monetary policy tightening has already begun.  But, and it’s a Kardashian sized but, whether rates will be raised or not has been the major driver for sterling this week!  So, the fact of a rate hike is a single moment in time, but the market spends weeks trading on opinion and sentiment and the merest hint of time on fact.

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This is where I depart from my trading mantra.

It isn’t an epiphany just a far easier way to get my point across! I doubt this is news to many, but it illustrates perfectly what I am getting at. Charts are the perfect gauge of opinion. That is, in my view, their most basic use to a trader. They reflect perfectly sentiment, opinion and the actual putting your money where your mouth is actions of trading. So, this week, Sterling has reacted to the various macroeconomic releases that have happened but only in the context of how it will affect the Bank of England’s decision next week.  

Then we move to the next fundamental. Since there is a full week to go, an opinion isn’t important, the reading of sentiment is. The basic premise for sterling is; hike up no change down.  But that action has already taken place.

The release of the decision is a driver for next week, but we need to make money this week and it’s created by what I call the “Sunday lunch” syndrome. In the U.K. we make a huge song and dance about those Sunday lunches. A huge piece of dead animal roasting in the oven, a wide selection of vegetables bubbling away on the stove and any number of side accompaniments to eat it with. It takes all morning to prepare and serve then it is all over in about ten minutes.

There is another analogy I use as well, but this is a family show!

But then there is always Brexit.

Talk about opening Pandora’s Box!

David Cameron sits in his country house contemplating. On his mantlepiece (figuratively) is his award as the most divisive politician this country has seen since Margaret Thatcher. In fact, he is probably even more divisive since he sowed the wind and left the country to reap the whirlwind.

The trajectory of Sterling, since the negotiations started and the gulf between the two sides became apparent, is an even more vivid illustration of what I mean, albeit a longer term one. Is there a trader anywhere who doesn't have an opinion on Brexit? There is no doubt that it will either mean a very long (Games of Thrones long) economic winter or an extended period where the economy falls into recession then gradually (very gradually) recovers. Either way, it must be bad for the pound.

Parity is a strange word. Its dictionary meaning is “the state or condition of being equal”. However, in FX terms it is far from that. The Euro fell well below parity not long after it came into being versus the dollar. The pound once flirted with parity also against the dollar. Now, there is a real possibility that the pound will reach parity against the common currency in the aftermath of Brexit.

But why isn’t it already there? That confirms what I already said. All traders have an opinion of where the pound will be after 29th March 2019 or whenever Brexit happens but that doesn’t mean anything when Mario Draghi is confirming just how dovish the ECB is or Donald Trump is getting into another argument with Congress or teasing the market over the next Fed Chair.