Finding the right currency pair to trade is key to success. We want steady movement of price but not unpredictability or undue volatility.
We also don’t want to move between currencies too often because, as a short-term trader, we get familiar with the flow (the news) of the currency.
We traded GBP/USD up until Brexit and then moved to USD/JPY. Since the recent North Korean influence we moved back to GBP.
In what detail do we follow the news of a currency? here’s an overview:
- Since November 2015 the pound (GBP) has depreciated by over 15% against other currencies, mainly because of worries caused by last year’s Brexit referendum.
- As the cost of imports has risen, inflation has jumped.
- At the last release, Consumer-price inflation (CPI) was 3%, the joint-highest level since 2012.
- But inflation may soon be on its way down again.
- The annual rate of CPI has averaged almost exactly 2%, in line with the bank’s target.
- Of note, as an open economy with a fairly volatile currency, GBP is prone to short-term spikes in inflation.
- The effect of the GBP plunge last year will, it is considered by reports, soon fade.
- Import prices will therefore not continue to rise sharply.
- There has been a close correlation between movements in sterling and the “core” rate of inflation (a measure which excludes the most volatile components). If that correlation continues, then within a few months, reports suggest, the headline rate of inflation should near 2%, assuming sterling holds steady.
- But the pound suffers whenever there is bad news about Brexit, and there is a fair chance that the months ahead will contain plenty of that.
- But for now, at least, inflation looks more likely to fall than to rise much further.
News is the first consideration on our pre-trade list. For a news release that we consider could provide volatility or unpredictability we are trade ‘flat’ a few minutes before release of the news, and usually much earlier than that.
We have an awareness of the news and importantly the possible volatility a certain news release can provide.
But we do not:
- second guess the effect of a news release, or
- trade with a certain trade direction in mind due to news or fundamental considerations.