As you know, we are at the threshold of two major events for trading dynamics throughout the world: the UK Election and the possible US-China Trade deal Phase One agreement.
The polls in the UK don’t close until 10:00pm local time today, however latest polls (earlier today) have indicated that although the Conservatives are likely to win the election, the Labour Party is closing the gap, which may lead to a hung parliament. If Boris Johnson was to win with a majority, it would likely clear the way for a Brexit deal and the UK would leave the EU. This would be looked at as favorable for the Pound, and the expectation is that GBP pairs will go bid. In any other outcome, GBP pairs are expected to move lower. Today’s price action of lower GBP/USD and higher EUR/GBP shows that people are uncertain about the outcome as they either short the Pound or take profits off the table before the results are released.
Regarding the US-China Trade deal, if the two sides can’t reach an agreement within the next few days, additional tariffs will be imposed on imported Chinese goods on Sunday, December 15th. If a deal is reached before Sunday, the tariffs will likely not be imposed, and current tariffs may be rolled back. The big question that remains is, “How much of the existing tariffs will be rolled back?” This morning President Trump indicated we are “Getting VERY close to a BIG DEAL with China. They want it, and so do we!”. In addition, the WSJ reported that “US negotiators offer to cut existing tariff rates by up to $50 Billion of Chinees imports”. This tweet and this headline caused a massive risk on scenario, which if true, could send the USD/JPY much higher and the S&P 500 to continue its run at All Time Highs through the end of the year.
It’s very difficult to trade when major events like these occur. Below are some reasons:
1) People see headlines first, and many times the headlines aren’t accurate.
2) Liquidity is usually thin heading into these events. So, many times initial moves are overdone, and people will sometimes try and execute orders and “any price”
3) TECHNICALS GO OUT THE WINDOW. You can’t use technicals to trade these one-off events. There are stops everywhere and many of them get taken out at horrible levels, only to have the markets reverse later.
4) Buy the rumor, sell the fact. Outcomes may already be priced into the market, and although you may expect markets to move one way because of the result, they actually move the other way as traders take profits and sell to the FOMO traders.
The main point is…WAIT! Be careful! Understand the dynamics of price action! There may be some very whippy price action over the next few days. Don’t just get burnt because of FOMO. There will be other trades once more information comes out and trends get established.
And if you do get involved, use proper risk management and stick to your trading plan!!