The GBP/USD pair has enjoyed a dramatic spike in recent days, following the announcement by Prime Minister Theresa May that the UK would be holding a snap election on June 8, 2017. Currency traders have not seen levels like this for the GBP/USD pair since the Brexit referendum in June 2016. The GBP/USD pair – the cable – is heavily overbought right now, but this short-term trend will give way to long-term bearish sentiment in coming weeks and months. For now, the GBP/USD is trading well above its 50-day moving average of 1.2420 and its 200-day moving average of 1.262. These are certainly positive signs for the sterling, and traders are wasting no time with call options on the cable over the short-term.
How are UK Market Fundamentals?
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Most of what happens in currency markets is based on speculation. That is to say that traders take out positions that influence the strength or weakness of a currency. There are some important economic indicators coming up for the UK economy, notably retail sales. The consensus is that a reading that is in line (or higher) with forecasts will be bullish for the GBP. The GBP/USD pair will naturally react to retail sales data from the UK based on bullish or bearish sentiment. Consumer spending is one of the most important gauges of market sentiment, and it provides insight into the underlying fundamentals of the economy. If UK consumers are spending, the economy is strong and able to withstand the geopolitical shock of a Brexit. It also drives inflation, which is necessary for economic growth.
In March 2017, UK retail sales figures improved by 1.4%. At the time, consensus forecasts were just 0.4%. This naturally had a positive effect on the cable, and it appreciated accordingly. However, April’s retail sales figures are cause for concern. All the euphoria we are currently seeing with the GBP may be undone in the wink of an eye if retail sales come in under expectation. The meteoric gains over 1.28 to the USD may be reversed towards 1.23 – 1.25 by the end of the month. It is clear that the GBP is highly sensitive to sentiment over substance. All manner of scenarios are possible when readings like retail sales are taken into consideration. The GBP/USD will rise if retail sales are as expected, or perform above expectations. Any dramatic performance in UK retail sales will bode well for the GBP and add much-needed momentum to its appreciation.
Trading Options with Financial Assets
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The flipside of the coin also holds true: if retail sales come in under expectations, the GBP will depreciate sharply. The Brexit issue is one of the most highly contentious geopolitical concerns for the GBP/USD. It has generally been a net negative for the pound, given the uncertainty and volatility it brings. Traders have wasted no time cashing in on GBP strength, and one of the ways they are doing this is CFD Trading options. Contracts for difference are derivative financial trading instruments that do not require the trader to take ownership of the underlying financial asset. Instead, it is a speculative trade based on buy or sell options. A trader would effectively buy a contract if he or she is bullish about the underlying asset, or sell a contract if he or she is bearish about the underlying asset. For now, CFD trading platforms are reporting net long positions on the GBPUSD pair.