Oh, that nasty British Pound.

Key News

  • Weak Norway GDP suggests Norges may raise rates at a slower pace than market
    expects, Credit Agricole CIB says, adding the possibility of a March hike has receded.
    Norges had raised rates twice since Oct, bringing its key deposit rate to 1.75 pct.
    “The slowing exports suggest a second break in the tightening cycle in March, as
    Bank looks to avoid further appreciation in the NOK,” its analysts say in a note. “We
    look for a further rate hike in Q2 … with a target of 2 percent!” (Reuters)
  • Australia is set for a strong expansion as resource investment ramps up to feed Asian
    demand for its commodity exports, a top central banker said on Thursday,
    underlining expectations for higher interest rates this year.

    Reserve Bank of Australia (RBA) Assistant Governor Philip Lowe also played down
    fears that China’s moves to tighten credit would threaten its recovery and foresaw
    strong growth in Asia making up for weakness in the developed world. (Reuters)

  • The International Monetary Fund said it would soon begin sales of 191.3 tonnes of
  • gold remaining in its plan to raise new resources for lending, with traders saying it
    may seek buyers among Asian central banks.
    But a drop of 1 percent in gold prices after Wednesday’s news also rekindled worries
    about an increase in supply — nearly four months after India’s purchase of 200
    tonnes boosted the country’s gold holdings to the 10th largest among central banks.
    The sale weighed on the currency in Australia, which is the world’s No. 2 gold
    exporter, and was partly blamed for a drop in oil prices below $77 a barrel. (Reuters)

Quotable

“Being aware of uncertainty and understanding the nature of probabilities does not
equate with an ability to actually function effectively from a probabilistic perspective.
Thinking in probabilities can be difficult to master, because our minds don’t naturally
process information in this manner. Quite the contrary, our minds cause us to perceive
what we know, and what we know is part of our past, whereas, in the market, every
moment is new and unique, even though there may be similarities to something that
occurred in the past.

“This means that unless we train our minds to perceive the uniqueness of each moment,
that uniqueness will automatically be filtered out of our perception.”

                             Mark Douglas, Trading in the Zone

FX Trading – Oh, that nasty British Pound.
I say nasty because the pound said to us (actually more like screamed), “YOU’RE WRONG!”

This week we tried playing the British pound in our PositionTrader FX service. And while we’d played the pound several times already this week in our SwingTrader FX service, the most recent attempt added some power to the sterling smack in the face we’ve taken.

In each instance mentioned above, we were looking to capture some piece of a corrective rally, for the pound to strengthen versus the US dollar. After all, so many indicators were telling us it was bound to happen … and happen now.

It didn’t.

And so what we must do now is forget it.

As always, in all our advisory services, we try to give ourselves an edge in every trade. It’s about lining up the probabilities in your favor when taking a position. And that’s exactly what we did with the British pound this week. Unfortunately, an edge does not guarantee prefect success.

On Wednesday the most recent FOMC minutes were released. And then this morning, new figures were released concerning UK public debt levels for the month of January. Each instance contributed to this GBPUSD trade moving against us (weaker pound, stronger dollar).

But why, when so many indicators were telling us this pair was due to rally?

Well, because perceptions were influenced by these fundamental news releases. Market participants had been influencing prices in a way that looked familiar to us, seemingly familiar enough to enter the market with an “edge.” The subsequent news changed the perception of enough participants to change the price pattern. In other words, our “edge” wasn’t so sharp anymore.

Does that mean we should abandon all those indicators that help us develop an edge and take a position in the market?

Not necessarily.

The work we put into our analysis, developing techniques that will prove successful over time, is aimed at harnessing probabilities. We will certainly be wrong at times; and while some times we may appear more wrong than other times, the ultimate goal is to be right more times than wrong over a given period of time (or … to make more money when we are right than we lose when we are wrong). And assuming our edge is actually more than just a hunch, we should be able to achieve this goal and be profitable.

If that’s not happening, then it’s time to rethink how we develop our edge.

For now, we grit our teeth, are mindful of our risk, and let the market do its thing. Our edge will be back.

And speaking of edge, the British pound has had an edge on the euro since late November of last year:

Weekly GBPUSD vs EURUSD

Prior to November the euro had noticeable edge over the British pound. The discrepancy between the two has since been eliminated. Now that the two are more closely aligned, it could mean GBPUSD struggles to hold its ground (based on our forecast for further declines in EURUSD.)