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British Pound Falls… Why This Goes Deeper Than the UK Election Shocker

June 7: "Cable appears poised to resume its decline regardless of the election result."

by Vadim Pokhlebkin
Updated: June 09, 2017

For a gambling man, the British election was the kind of event where fortunes can be made (or lost).

Indeed, the amount of money bet on the June 8 election was unprecedented. Reported the British Telegraph on June 7, one day before the election:

Punts on General Election ramp up as political betting set to hit highs

[UK-based bookmaker] Betfred said it expected to hit a political betting record of £2m - double the amount of its previous high seen during the French presidential election -- while Sky Bet said it expected to see 30pc more in sales than its previous record set during the EU referendum.

Bookmakers' odds seem to be more upbeat on the potential for the Prime Minister Theresa May holding on to the top job... ...there had been a "real surge" of bets in the past 24 hours, adding "every big bet has been for the Conservative Party".

You already know what happened: Those "big bets" for the conservatives did not pay off.

We won't gloat or say that people who were betting on Theresa May's victory didn't know what they were doing. On the contrary. Many were probably experts at assessing the odds of their bets, having done that for years if not decades, turning every stone, talking to everyone whose opinion counts -- all that to make the most well-researched, rational, sure-fire decision.

The problem is, this model doesn't necessarily take into account the research suggesting that elections aren't a rational process.

Dan Ariely, the author of "Predictably Irrational" and a professor of psychology and behavioral economics at Duke University, has studied for decades the overwhelming influence of emotion on our decision-making process. Here's what he told CNBC in an interview taken after Donald Trump's victory:

"There's probably never been a better period in life to represent the irrational side of human decision-making," Ariely said...in reference to the outcome of the U.S. presidential race.

One of the explanations presented by the professor is fear, a powerful emotion that's ingrained in humans' genetic makeup and can impair rational thinking.

Robert Prechter's research into the role that mood and emotions play in our decision-making process has echoed the same thinking for years; this is from his 2003 " Pioneering Studies in Socionomics":

A person communicates his mood when he puts on a record, chooses a movie, decides what sporting event to see or chooses a book to read.

Many people, as is obvious from the swings in elections, base their votes on their then-current mood rather than on rational thought.

In other words, when calculating the odds of a victory, taking into account the voters' mood may be even more important than adding up all the rational pros and cons.

This translates into the financial markets, as well -- because they too are governed by traders' collective mood to a much larger degree than the mainstream finance has been willing to consider.

After the results of the British election became available late on Thursday, the British pound fell hard against the U.S. dollar. Friday morning, predictably, the headlines attributed the sell-off to the "shocker":

Pound Sinks Amid New Variables on Exiting E.U. (New York Times, June 9)

Yet, here's the real "shocker" -- for those unfamiliar with tracking and predicting the waves of the market's collective mood using Elliott wave analysis, that is.

On June 7, one day before the election, our Currency Pro Service editor Jim Martens took a long, hard look at Elliott wave price pattern in GBPUSD charts and wrote:

GBPUSD

Posted On:June 07, 2017 03:30 PM

Bottom Line: Cable appears poised to resume its decline regardless of the election result.

Outlook: If cable drops after the election scheduled for Thursday the press will likely pin it on the outcome. Note that the decline began three [weeks] ago and the recovery that followed looks corrective. It appears traders are poised to sell sterling regardless of the election result.

And here's what GBPUSD did after the election surprise:

Our emotions guide us to a much larger extent than we think. Selection of leaders, like betting on bullish or bearish outcomes in the financial markets, is not a rational process.

In our experience of observing market behaving for almost four decades, only Elliott wave analysis allows you to peek around that next corner with a degree of certainty no other method can give you.

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