I received an email about a comment I made in this mornings Forex video. The question referred to a comment about “London squaring up for the weekend”. I thought I would elaborate.
London tends to close up shop at 5:00 PM London time. This corresponds with 12 PM NY time. Each day you may notice that there tends to be some extra activity between 11:00 AM and 12:00 PM. Part of this has to do with the “forex fixing” that occurs at 11:00 PM NY time. Think of it as a benchmark rate for pricing. Sometimes there is some moves in the currency pairs that may be a result of this fixing. It can cause some volatility in rates just before and just after 11:00 AM.
The period from 11:00 to 12:00 is also when European and London traders go home for the evening. Since traders may not be able to monitor the positions as closely as they would at the office, they tend to clean up some of the positions during this time period. Why? There is more risk when you are not monitoring positions.
The action yesterday afternoon is proof of the risk that can occur when London/Europena traders are in the pubs or at home. A London trader who was short the EURUSD may have had a big negative surprise when they checked the market from home that evening. Someone who was long would have been pleasantly surprised. Whether a winner or loser, the risk was increased.
On Friday’s, risk increases for all as over the weekend the market closes for everyone until Sunday night when liquidity returns. The potential exists for an event that causes the market to move dramatically from Friday 4:00 PM to Sunday 5:00 PM. It can be anything from a terrorist attack to a natural disaster to a comment from a key central banker in a Sunday newspaper. When risk increases, smart traders lessen positions. When they do this, the supply/demand equation can get out of whack in one direction and then reverse and get out of whack in the other direction. All of which for no apparent reason.
Today’s moves in the GBPUSD seems to exemplfy this dynamic. The price has been up and down with little catalyst behnd the moves. To me it simply seems to be short term flows in a more illiquid end of summer market. Standard support/resistance levels are not really slowing the moves. It just does not have the rhythm that the market “normally” experiences - at least of late.
So traders should remain aware of the dynamics of the daily London close, and in particular the Friday close, and trade accordingly. Normally that means cutting back on positions and be on the lookout for choppy trading conditions. If you are aware you can prepare and not be surprised. It may frustrate but at least you won’t be as surprised.
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