Yesterday traders found out what really matters for the British pound. The GBP pairs were on a rollercoaster as news and rumors about Brexit developments created chaotic moves.
As it is often the case before important deadlines, the market reacts on anything suggesting that the balance may lean towards a specific outcome. Responsible for the abrupt market moves are the trading algorithms and high-frequency trading firms that buy and sell on anything hitting the wires related to their trading instructions.
So was yesterday. At 11:00 AM CET, the European Commission issued a statement saying that it sent a letter of formal notice to the United Kingdom regarding the breaching of the Withdrawal Agreement.
It was enough to send GBP lower across the board.
Infringement Process Against the United Kingdom
The letter basically starts the infringement process against the U.K. for breaking the Withdrawal Agreement. On the news, the GBP pairs tanked.
In fact, even before the actual statement, the GBP pair traded with a bearish tone. Rumors hit the wires. On the announcement, the GBPUSD fell more than one-hundred pips points – a big figure. So did the GBPCHG or GBPCHF. Also, the EURGBP moved above the 0.9150 level.
A few minutes later, the GBP reversed the move completely. Rumors indicated that there is an agreement on the free landing zone and that the only sticky point that remains relates to fisheries.
In other words, bullish GBP as it showed a deal is possible, despite the European Commission starting legal procedures for the breaching of the agreement. As such, the GBP surged back to where it was before the European Commission statement and press conference. More precisely, all pairs reversed the original one-hundred pips move.
Finally, in a last twist of events, the rumors were denied. There is no agreement whatsoever, which means the two parties are not closer to a deal. Guess what? The GBP tanked again. For those in the markets during the 2016 pre-referendum price action, this is a deja-vu.
The point of this story is that trading has a strong fundamental component. Technical analysis emerged in the last years as an alternative to trading market inefficiencies. More precisely, to discover and trade them.
However fundamental analysis still drives markets, even liquid markets like the currency market is. Because of that, trading with a stop-loss is mandatory, just as mandatory as having a risk-management system in place that protects the trading account.