Trading the Cable – Bulls and Bears

The cable (GBP/USD) recently reversed course from a high of 1.4376 towards its current level around 1.35. The sudden change occurred after a recent strengthening of the greenback based on strong economic data. At its current levels, the cable is trading beneath the 50-day moving average of 1.395 and beneath the 200-day moving average of 1.355. The sharp drop took place between mid-April and May; however a stabilization has taken place since then.

Many factors have been attributed to sterling weakness, notably Brexit-related pressures, dollar strength, geopolitical uncertainty et al. However, the biggest drivers of sterling weakness are dampened expectations of additional rate hikes. Recall that the Bank of England raised interest rates by 25 basis points in November 2017. This was the that such a decision was taken. Mark Carney, BOE Governor announced the 7/2 decision to increase the interest rate to 0.5% was needed to boost the currency, and curtail inflationary pressures.

The BOE (Bank of England) was largely expected to follow the Fed and adopt a monetary tightening policy. However, the BOE is behind the eight ball on this issue. The Bank of England decided to leave the target rate for overnight deposits unchanged on Super Thursday. Several other economic indicators such as disappointing in Q1 2018 were attributed to poor weather, while falling inflation is expected to continue. A reason why the GBP/USD pair is losing ground is the resistance against a rate hike. Previously, the BOE was expected to raise interest rates in August 2018. Now, there is talk of the date shifting to November 2018. Speculators typically react negatively to such commentary and this is one of the reasons why the GBP has retreated.

How is the USD Performing?

The US dollar is riding a wave of positive sentiment with a reading of 92.54 on the DXY. The US Dollar Index is a broad measure of the US dollar’s performance against a basket of 6 currencies. This trade-weighted index measures the greenback against the SEK, JPY, GBP, EUR, CAD, and CHF. The 52-week trading range of the US dollar index has a reading of 88.25 on the low end and 99.70 on the high-end. Currently, the year to date gains for the DXY are positive at +0.47%. Over the past 1 month, the dollar has appreciated sharply by 3.07%, although the recent performance is neutral. Given the bearish performance of the cable, the 1-month performance of the USD is apropos.

Traders are advised to follow news updates, particularly geopolitical events, interest-rate announcements, inflation rate data, and unemployment data. broadcasts all relevant economic indicators that affect currency pairs like the cable, the USD/JPY, GBP/EUR, and others. By staying abreast of market news and developments, it is possible to make calculated decisions vis-à-vis call options and put options on Forex pairs. The next meeting of the Fed FOMC will be taking place on June 13, 2018. There is a 100% probability (according to the CME Group FedWatch tool analysis) of rates rising by 25 basis points in the region of 1.75% – 2.00%. If this happens, we can expect the GBP to weaken further against the USD.

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