It is always interesting to see how certain pieces of news play out differently across different currency pairs. If something is happening that is positive for the U.S. Dollar, that doesn’t necessarily mean that it all plays out perfectly evenly across all of the dollar-related pairs. Instead, it may have a stronger impact on certain pairs than others.
Imagine that a good piece of news comes out about the strength of the dollar, and you are excited because you are short the GBP/USD. You have seen some pips moving in your favor, but you are concerned because you notice that the USD/JPY has moved even higher and more aggressively on the news. The difference between what you made on your short GBP/USD trade versus what you could have made on a long USD/JPY trade is puzzling.
The difference between the two may come down to the cross currencies.
The USD/JPY trade may well have broken through some resistance levels that caused a lot of other traders to jump in on the trade. However, the GBP/USD might not have moved as much if it did not break through those same levels. In fact, it might be held in place because there are cross currencies that are connected to the U.K. Pound that are holding back some of the movement that might otherwise have been seen in the GBP/USD trade.
In the example above, when USD/JPY broke through the major resistance level (blue dashed line), the mixture of stop losses being hit and breakout traders hopping on the long trade forced it even higher.
Because buying more USD/JPY weakens the yen, this would cause GBP/JPY (and perhaps more yen-based pairs) to break through its major resistance level. once again hitting stops and attracting breakout traders, pushing GBP/JPY even higher.
When resistance is broken, stops are triggered along with breakout traders moving into new long positions, pushing GBP/JPY even higher. This triggers the Pound to strengthen and decelerates the force of your short GBP/USD trade. The GBP/JPY cross buying acts as a safety net. Thus, GBP/USD didn’t shift as much or as quickly as the USD/JPY.
Your trade is held back by the fact that there are cross currencies that must be considered in this case. It is so important to examine what these currencies can and cannot do based on other market conditions and how things are playing out. You may be surprised to learn about the specific types of trades that you ought to make based on what the cross-currencies are doing.
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