Thursday, October 11, 2012

Conclusion: EURGBP is driven by fundamentals

I spent an hour brewing over the EURGBP and I've concluded that price action on the EURGBP is driven mostly, or perhaps even purely, by fundamentals (by fundamentals, I mean factors outside the EURGBP chart). Some technical analysis will be useful, but a purely-technical trade will have difficulty on the EURGBP. I will explain why.
The EURGBP represents the difference between the EURUSD and GBPUSD. The EURUSD and GBPUSD make up 28% and 9% of the forex market, respectively. The EURGBP makes up 3%.
The combined market share of the EURUSD and GBPUSD is 37%. Technical traders on the EURUSD and GBPUSD overpower those on the EURGBP by a factor of over 10:1 (37% vs 3%). If I see two signals on the EURUSD and EURGBP, which one will most technical traders trade? Most likely the EURUSD. The technical signal on the EURGBP will be overshadowed by the signal on the EURUSD. Any technical trader on the EURGBP will be a fart in the wind.
This is a very simplistic argument, but I hope to illustrate the principle I thought of. The technical side of the EURGBP will mostly be found on the EURUSD and GBPUSD. The EURGBP just measures the difference between the two pairs and shouldn't be traded on technicals.

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