Gaps were printed on all GBP currency crosses this morning. The reason? A referendum for Scottish independence is coming (Thursday September 18, 2014). Scotland wants to break away from the United Kingdoms to be an independent state. Shocking the market into action is a poll over the weekend that shows ‘Yes’ leading.
So what caused the gap?
For the first time since this referendum was set it, the ‘Yes’ camp managed to get 51% through polls vs 49% for those against the split.
What does this mean for the market?
Effectively if Scotland pushes through with independence, it will set a precursor in the region. One of note is Catalonia’s push to break away from the Kingdom of Spain to establish independence (referendum on Sunday November 09, 2014).
With Scotland’s referendum, some questions that should pop into mind for traders and investors are:
- What currency will Scotland use?
- How much of UK’s GDP will ‘disappear’?
- What will happen to UK’s credit rating?
- Will Scotland assume UK’s debt?
- Will Scotland remain in European Union?
As we can see, each question is high impact which explains the shocking market gap this morning.
Most important question: Can we predict the outcome for GBP based on technical analysis? Can make money?
Hourly charts of GBP crosses
Politics aside, we address the more important question. Can we make money from this?
Let’s look at the GBPUSD hourly chart to draw some clues from the gap.
Taking a Fibonacci reading from the high of Friday 05 Sept 2014 to this morning’s low, we can see that in lieu of the strong gap down of 140pips, the market has retraced to an overall of 38.2%. In reference to a previous article written by Tiong Hum on Market psychology at important fibonacci retracement levels, he wrote that:
In a well entrenched trend, price is not able to reach deep retracement levels…
This is evident in GBP crosses with retracements, following the gap in the morning, not exceeding 38.2%.
GBP on the whole is currently experiencing a downward slide with any further news of Scotland’s possible independence likely to exacerbate this move.
A look on the Monthly charts of GBPUSD clearly reveals that although 2014 made a new 5 year high, this is in fact just a 50% retracement of the plunge in 2007-08.
What does it mean for traders?
I anticipate some questions from fellow traders which I’d like to address here:
- Will the gaps close? See our posts here, here and here. Some gaps close, some don’t so it is better to focus on the merits of setup each currency pair is showing. Since the gaps today moved in the direction of trend and price action are already showing resistance at Fib levels, then those levels are resistance we should be watching.
- Go long or short? If you looked at GBPUSD only, the pair is showing downtrend flow in hourly, 4-hourly and daily time frames so it is sufficient to say that if you are trading these time frames, going short with the trend is the right thing to do.
As a reminder however, those who have open positions already committed should look at target levels. Those who don’t have open positions already should be mindful of another gap (which we don’t know direction) over the weekend.
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