What the market has priced in already...


As we see, we are around the level of post referendum, when Brexit, especially hard Brexit was not certain at all. This is quite an optimistic and strong reaction from the market. The market has priced in almost a reversal in British approach.

No hard Brexit is just a hope

What we have to remember as traders is that right now it is just hopes priced in, without generally any hard facts to support them yet.

As it is used to be said 'sell the gossip, buy the fact'. The facts are still to be seen and assesed while gossip sold pretty well, giving disconnected with reality 180 degree sentiment change in the market.

Why disconnected? Well, maybe polls are not trusted recently, but this time they show Conservative Party being 20% ahead. That is quite a decisive prediction. Lead by Theresa May and her party, British would have hard Brexit almost assured, that is unless the party itself had huge internal differences in Brexit approach.

It seems that market just might have gotten a bit too excited again, this time to the upside.

The most positive scenario

Even if hard Brexit was somehow forgotten by the government, there still would be Brexit on the table. Short or medium term, that gives no positives for UK. Moreover, there is not much to gain post elections - most good perspectives are or will be priced in before we know the result.

For traders going with the trend now, there is a little to gain with a lot to lose, including a high risk of SL being executed at different price than planned. With the positive scenario we will likely see some bigger spike up and then slow and gradual strengthening of GBP, not sure to continue for a longer time though. For example on GBPUSD we still have monetary policies divergence - carry costs for keeping GBP and the gap between interest rates is impossible to be closed short term.

Brexit referendum - similarities?





The first chart shows the current move, second is from before the Brexit referendum. I'd like to present you the reason why the current situation is even more Brexit than the protagonist one. Current move is shown in 1H chart whils Brexit poll move is shown on 4H, and still the current chart shows a sharper and faster movement. That points to a highly emotional and a bit rash trade.

Sure, we might say there is some political risk with the US right now, hiking was a little questioned and then there is that snap election in UK that might reverse a lot. Out of those three, the only argument that might be at least considered partially a fact is US political risk, connected mainly with foreign policies. That adds again to the theory that it is mostly gossip being sold by now. We also cannot exclude political risks to come with the new government in UK.

Risk is now great for buyers, reward for short term is likely small. Also, in any case, there must come some correctional move sooner or later.

What to do, then?

If you go hard for the positive scenario for the UK - you definitely need to watch the elections plus declarations from the winning side closely, probably consider not sleeping for a day. SL for longs will have to be close enough to be realized before market loses fluidity if things go the bad way, likely triggering panic. So the best tactics would be not sleeping and trying to avoid SL execution, closing by hand if things go wrong.

If you decide to go for the more likely scenario as currently polls and analysts see it, meaning shorting GBP, EURGBP might be a nice pair to trade with biggest move. If you go short on GBPUSD - use the closest historical resistance for SL area and put TP somewhere far, even at new lows, maybe not yet discovered by the market. If think go positive for GBP - post spike market will just move up for some time slowly or moderately, your SL will be executed with no extra no-fluidity cost or if you decide to watch elections and things go against you - you may close order by hand avoiding SL execution, even with some chance of profit resulting from market uncertainity/volatility. You still will have time to switch to long.

I will not say short is a better trade here, it just has much more potential, like it was on Brexit. What I may tell for sure - this will be one of events that might give no space for a mistake.
Translate to English Show original