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Sterling — volatility brought on by UK election news

 

  • With 14 days to go until the UK heads to the polls, the outcome still hangs in the balance.
  • The fabled YouGov MRP ‘super-poll', which is credited with providing an accurate projection was released Wednesday and puts Boris Johnson's Tory party in the lead.
  • Reliable information is a valuable resource and trading off the back of it can generate profits. The trick is being the first to know it.

 

Statistics never got more interesting. The make-up of the Multilevel Regression and Post-stratification (MRP) poll released by YouGov on Wednesday has itself become something of a headline grabber. The political landscape is nowadays full of surprises, but few would have predicted that the news headlines of Thursday might include: ‘Six thoughts on YouGov’s MRP model of the 2019 election’ (source: New Statesman).

The survey benefits from being drawn from a significantly larger data set than a lot of other polls. Over the course of seven days, 100,000 ‘panellists' are interviewed whereas a lot of other polling methods ask the opinion of approximately 1,500–2,000 people.

The MRP methodology for calculating voting intentions uses “the poll data from the preceding seven days to estimate a model that relates interview date, constituency, voter demographics, past voting behaviour, and other respondent profile variables to their current voting intentions” (source: YouGov).

A commonly used paraphrasing of the technique is that it considers data on a constituency basis and scales up to a national level, whereas a lot of other polls work the other way around.

The reason that traders and analysts are improving their understanding of the MRP metrics is that in the 2017 election, the YouGov version stood out from the rest of the pack in terms of accuracy of prediction. It achieved near-mythical status by suggesting 10 days before polling day that Theresa May might lose her majority — at a time when other polls were predicting her ahead by an average of eight points.

Source: The Guardian

 

Market response

Thursday is seeing questions being asked about exactly how closely the markets have been watching the YouGov results. The suggestion is that the results may have been leaked.

In the build-up to Wednesday's release, news-agency Reuters had it flagged as a key news release.

“LONDON (Reuters) – Market research firm YouGov said it would publish a closely watched poll which will seek to predict the outcome of Britain’s Dec. 12 at 2200 GMT on Wednesday.”

Source: Reuters

Forex currency pairs themselves are unregulated. Although the firms providing brokerage services do often operate under licenses from regulators, the instruments, assets and markets involved are not. There is therefore not necessarily any need for a regulator to get involved with a ‘strange’ market move at 6:00pm Wednesday, but it does mean there are some raised eyebrows.

GBPUSD — Five-minute candles — 27th November–28th November:

Source: MetaTrader

Reuters was justified in noting the importance of the YouGov MRP poll. The news release made at 10:00pm UK time brought about a rally in sterling. Over a 40 minute period, GBPUSD moved from 1.2885 to 1.2950. The poll forecast that the Conservative party would win 359 seats and have a working majority of 68 seats. This was taken by the markets to be good news for sterling as it points towards a smoother Brexit.

Four hours earlier, at 6:00pm UK time, the five-minute GBPUSD candle chart saw volatility not unlike that seen at 10:00pm. GBPUSD moved from 1.288 to 1.290 within minutes and has been flagged by some in the trading community to suggest the poll result could have been leaked. Importantly the trading volumes at the time of the 6:00pm move were greater than at 10:00pm. The less sceptical might put this down to European time-zones and the need for traders to be tucked up in bed so that they can get a good night’s sleep.

This is the forex markets and traders would do well to remember the risks that come with trading — such instances are often met with the approach of ‘move along, nothing to see here’. What the moves do demonstrate, however, is how sensitive the markets are to election-based news flow — a situation that will remain right up to polling day on 12th December.

GBPUSD — Five-minute candles — 27th November–28th November:

Source: MetaTrader

Halfway through Thursday’s trading session, the supporting trend line of the upward moves over the last 24 hours has been broken. The bulls aren't going to have everything their own way. The daily chart shows the downward trend line, which, although broken in mid-October, still applies some downward pressure.

GBPUSD – One day candle — September 2017–November 2019:

Source: MetaTrader

FXStreet points out that the four-hour chart is now showing positive momentum. On that timescale, price action is now above the 50, 100, and 200 Simple Moving Averages. The analysis continues:

“Looking down, support awaits at 1.2915, which capped cable early in the week. It is followed by 1.2890, which provided support last week, and by the stubborn support line of 1.2820.”

Source: FXStreet

Despite the excitement of Wednesday evening, the four-hour chart also shows GBPUSD trading within a relatively tight range 1.276 – 1.301.

GBPUSD — Four-hour candle — 30th August 2019–November 2019:

Source: MetaTrader

The financial markets have taken great steps to try and improve the levels of governance and challenge some of the old sayings such as ‘there's no information like inside information'. But getting an early idea on a news release can be exceptionally profitable, and vice versa.

The GBPUSD forex market on Wednesday demonstrated the volatility that can be brought on by news releases. The tight trading range also suggests that markets have not yet taken a view on the outcome of the election. There are two weeks left until election day and even a party struggling as much as Labour is in the polls still has a ‘puncher’s chance’ of a knockout.