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Getting a Handle on Volatility in British Pound

Politics and inter-market correlations aren’t always enough to gauge future trends

by Vadim Pokhlebkin
Updated: January 12, 2017

On Monday (Jan. 9), the British pound fell again:

“Pound Crashes to 10-Week Low” (Bloomberg, Jan. 9)

Most analysts blamed the new GBPUSD sell-off on a Brexit comment by the UK's new prime minister, Theresa May. But one source offered a less conventional perspective:

The REAL Reason the British Pound is Falling vs the Euro and Dollar -- ... A drop in inbound capital from investors buying into the bond market may be the significant factor in Pound sterling’s recent decline...

“...the Pound is reacting to moves in ‘real’ yields on UK sovereign debt. The real yield is a bond's yield minus inflation.” (Poundsterlinglive.com, Jan. 11.)

Looking for an explanation in the bond market is an interesting idea. And there may be something to it.

But whether you look at bonds, politics or something else to explain the pound’s weakness, you’re explaining a move that’s already happened. And for a forex trader, the real question is, "What will the pound do tomorrow?" Let's look at how Elliott wave analysis handles it.

On Sunday -- one day before the sell-off began -- our Currency Pro Service posted this forecast (excerpt; partial Elliott wave labels shown):

GBPUSD
[Posted On:] January 08, 2017 09:14 AM

Outlook: Cable did turn lower Friday, and the decline should continue below 1.2200...

Analysis: The rise from 1.2200 to 1.2432 unfolded in three waves, which makes it corrective. A sound break of 1.2200 would signal the correction ended at 1.2432 and a decline...is underway.

To start the week, both [Elliott wave] counts point toward lower levels. 

And here's where the pound found itself on Monday and Tuesday:

 

Following this sell-off, on Wednesday GBPUSD rebounded sharply. While there may be more than one explanation for that, Elliott waves already hint at where it may go next: Looking at cable’s larger-degree Elliott wave pattern, it appears that it's probably not quite out of the woods yet.

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