The British pound was an FX standout in the second half of '13, appreciating from under $1.50 to close out the year near $1.6600—a gain of 10% in Q3 and Q4. Current trade has March futures approximately .007% below that level. Where from here?
To give two different perspectives let's look at both weekly and daily charts:
Weekly British Pound:
For the last five years, you can see the channel that has largely contained the cable, with support just above $1.50 and resistance just below $1.70. Slow Stochastics on the weekly chart have started to roll over...a settlement below $1.61 would confirm an interim top. Note that volatility is near the lowest levels we've seen in years, so purchasing option premium may be a viable strategy.
Daily British Pound:
The trend has clearly been up for the last six months but futures have lost ground the last four days and as of this post are challenging their 20 day MA (light blue line). I believe the trend line will be breached this week or next and on that my target would be a 38.2% Fibonacci retracement, putting March futures near $1.5925. On the docket this week on Thursday is a BOE meeting where they are expected to keep rates unchanged at 0.50%. It is not so much if rates are adjusted in my eyes but the verbiage and guidance for meetings in the future.
Previously the BOE pledged not to look at raising rates above 0.50% until employment fell to 7%, but this target could be hit soon. There are mounting expectations that governor Carney and BoE policymakers will change the threshold for considering interest rate rises within months.
Again, while Thursday's decision is likely to keep rates on hold it comes as economists predict the Bank will soon lower the unemployment target under its forward guidance policy, lending to the strength of the economic recovery and the currency's strength.
While the BoE is not expected to make changes to its forward guidance policy at this week's meeting it could reduce the unemployment target to 6.5% soon. If the BoE lowers the bar it will likely mean rates would remain at lower levels for a lengthier time, which to me should be interpreted as a bearish development. For that I would be willing to wade into bearish trade.
Trade ideas:
- Short (1) March futures while simultaneously selling (1) at the money put. Current trade the $164 put you could collect $1125 per. A delta of 50% you would capture about 1/2 the underlying move and you allow flexibility with the second leg.
- Buy (1) March $164 put (current cost $1125) and also buy (1) February $166 call (current cost $330). The cost of the trade would be $1125 + $330 = $1455 plus 2 transaction costs. On an adverse move higher the calls should cover about 1/2 your losses in puts. On a move lower cut losses on your calls and look to make up that loss on your puts.
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