**GBPUSD and EURUSD Show SMT Divergence: What Forex Traders Need to Know**
*By Patrick O’Brien*
*Originally published on The Tradable*
In the ever-evolving world of foreign exchange trading, divergent price action across closely correlated pairs can provide priceless insight for shrewd traders. A classic example arises when the GBPUSD (British Pound/US Dollar) and the EURUSD (Euro/US Dollar) display Smart Money Technique (SMT) divergence. This nuanced phenomenon offers a deeper look at underlying market dynamics, and when interpreted correctly, it can be used to anticipate pivotal reversals and trading opportunities.
This article will explore SMT divergence, how it applies to GBPUSD and EURUSD, key signals to watch for, and practical strategies for leveraging this advanced technique.
## Understanding SMT Divergence
Smart Money Technique (SMT) divergence is a concept that has gained traction among institutional and retail traders alike. At its core, SMT divergence is based on analyzing price discrepancies between two highly correlated instruments—in this case, GBPUSD and EURUSD.
### Key Principles of SMT Divergence
– SMT divergence uses correlation as a foundation. GBPUSD and EURUSD share the USD as the counter currency, and the economies of the UK and Eurozone are closely intertwined.
– While these pairs often move in tandem, subtle differences can reveal underlying market intentions.
– SMT divergence signals when one pair makes a new high or low and the other does not, indicating a potential shift in momentum.
– Smart money may be manipulating one pair, causing a temporary imbalance that can present trading opportunities.
## Recent SMT Divergence: GBPUSD vs. EURUSD
Market analysts have recently observed striking SMT divergence between GBPUSD and EURUSD, a development that all serious forex participants should note.
### Recent Price Action
– Both pairs experienced significant upward momentum, benefitting from a broadly weaker US Dollar and improved risk sentiment.
– However, while EURUSD managed to break above a key resistance zone and print a new local high, GBPUSD stalled and failed to confirm a similar breakout.
– This lack of synchronization triggered a classic SMT divergence, with important implications for both market direction and potential reversals.
### What Does This Mean for Traders?
– The divergence suggests that the Euro’s strength relative to the dollar may not be sustainable or may be overextending.
– GBPUSD’s failure to confirm EURUSD’s high signals caution; it may be warning of possible exhaustion or a looming retracement in both pairs.
– Traders watching for confirmation from both pairs before building conviction were given a timely warning.
## How to Spot SMT Divergence in Forex Trading
Identifying SMT divergence requires both a close watch and an understanding of price relationships. Here is how traders can systematically spot and interpret SMT divergence:
### Step-by-Step Identification
1. **Align Timeframes**: Analyze both GBPUSD and EURUSD on identical timeframes for consistency.
2. **Identify Key Swing Points**: Mark recent highs and lows for both pairs.
3. **Note Discrepancies**: Watch for situations where:
– One pair marks a new high or low while the other does not.
– One pair breaks clear levels, while the other stalls or reverses.
4. **Confirm with Other Tools**: Supplement analysis with volume indicators, oscillators, or order flow.
5. **Monitor Market Reaction**: Look for follow-through or immediate rejection in subsequent candles.
6. **Assess Macro Factors**: Incorporate relevant economic developments that may explain the divergence.
### Example
– If EURUSD makes a decisive push above a recent swing high, but GBPUSD fails to follow suit (even with supportive macro environment), this is a bearish SMT divergence signal. It may imply that the Euro’s move lacks broad market support and could reverse.
## Why GBPUSD and EURUSD Show SMT Divergence
Though GBPUSD and EURUSD are both impacted by US Dollar flows, their individual reactions to global and regional factors can
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