In this final newsletter for 2021, we look back at our short EURGBP trade idea we sent last Wednesday and why it didn't end up as anyone would normally expect under the circumstances (BOE surprise rate hike).

Elsewhere, the action in markets has slowed down considerably already, so there won't be a new trade idea for this week. Nearly all major Fx pairs have clearly established ranges of around 100-200 pips, and those will likely hold during this entire holiday period.

Note: Stay tuned for our 2022 yearly Forex outlook that will be out in the first week of the new year (January 3-7, 2022). We will then be fully back with our regular schedule of sending you the weekly analysis every Monday and one trade idea per week starting from January 10.

Last week's price action is a "friendly" reminder of how high-impact risk events can distort trade signals. The wild, two-way price swings can blow up any short-term trade signals or patterns that may otherwise work with success for traders.

This seems to have happened to our short EURGBP trade, which, while not being stopped out, didn't reach the profit target either. What's more surprising is that despite the Bank of England hiking rates (against consensus expectations), the pound failed to hold onto its initial gains. The shocking BOE decision was supposed to help our trade and quickly push EURGBP toward the 0.84 targets. But it didn't.

Yes, the spread of Omicron in the UK seems to be the main factor hitting GBP now and adding to bearish sentiment despite the rate hike. But was it the only culprit for the entire bullish reaction in GBP to fade, or were there other factors too? Perhaps the ECB's meeting just 45 minutes following the BOE played a role in the EURGBP price action too? Moreover, the Fed had its meeting a day before, and the market reaction to it wasn't done by the time of the BOE and ECB decisions.

EURGBP now returning down toward the Thursday lows suggests that indeed the mixed reactions to the packed calendar and several central bank events last week have likely played a role in this EURGBP whipsaw. Traders selling dollars after the Fed and then scaling back on EUR shorts after the ECB is a mix that creates stronger buy pressures in EUR than GBP, and this alone can push the EURGBP pair higher.

This is why we often prefer to stand away from trading during busy calendar schedules such as the one last week. Although the risk-reward to short EURGBP was attractive, and indeed, there was no damage from this trade, the price action not working out as normally expected is a practical lesson about what can happen around central bank decisions.

We've now closed the EURGBP trade at breakeven. It may still work - EURGBP may still reach the 0.84 target, but it is better to return to this trade after the holidays when normal market conditions resume.

Elsewhere, the ranges in Fx and in other markets are holding firmly ahead of the holiday season. This is likely to remain the case as the low volatility mode has already begun. Barring any unforeseen shock events that may disrupt markets, it will most likely persist at least into the first week of January. 

On this note, we also need to be aware that should any such event occur (or simply a fat finger mistake or anything like that), it could cause big price spikes due to the thin liquidity. The JPY flash crash from January 2019 is an eerie memory highlighting the importance of risk management during the holidays. It is another reason to perhaps reduce your position size and close any trades that don't have much longer-term potential.

We would expect normal liquidity and trading conditions to fully resume by the second week of January.