The British pound (GBP) leapt by 70 points against the US dollar (USD) on news that UK Gross Domestic Product (GDP) for Q1 has grown by 2.9%, year-on-year. This is higher than the previous quarter's 2.4% and also higher than expected. GDP is a key indicator of a country's economic success and a robust figure may create more demand for local currency.
Looking forward, tomorrow at 14:00 GMT, we have the United States ISM Manufacturing data where a figure above 50.0 indicates a healthy manufacturing outlook. The forecast is 53.1, a higher result may strengthen the US dollar.
On Thursday, 2nd July, we have the U.S. Non-Farm Payroll (NFP).This is the most highly anticipated data announcement providing investors with the monthly change in employment excluding the farming sector. In May, we saw employment rise by 280K and for June it is expected to have risen by 225K. A strong result may trigger the Federal Bank of America to increase interest rates earlier than September and, in-turn, this may strengthen the US Dollar. Whereas a poor result may have the opposite effect and weaken the dollar. Whatever the outcome, it is important to note that prices are often volatile around the time of the announcement and large swings, regardless of the result, may be observed.
To trade GBP/USD this week using a limited risk trade and to avoid stop-outs, you may buy an option. You may buy a Call option if you expect GBP/USD price to rise and you may buy a Put option if you expect the pair to fall. The following examples traded on the optionsReasy platform explain how.
Trading an Uptrend - Buying a Call
If you expect GBP to strengthen this week and/or USD to weaken, your forecast is for GBP/USD to move UP. You may buy a Call option to trade this because a Call gives you the right, but not the obligation, to buy GBP/USD at a specified price over a certain period of time.
The specified price is known as the strike. As GBP/USD market price rises above the strike price, the Call option's value rise. The option has an expiry date, hence the move must occur by expiry.
The image below shows a GBP/USD Call option to buy 10,000 GBP at 1.5800 over the next 3-days. It costs 33.67 USD to buy this option.
6-steps to buying a Call:
1. Select the pair you want to trade, we have chosen GBP/USD
2. Select the option type, we chose a Call
3. Enter the Strike price, we entered 1.5800 on the expectation that GBP/USD will rise above this level
4. Select an expiry date depending on the duration in which you expect the move to happen, we chose 3-days
5. Enter an amount, we have entered 10,000 GBP
6. Evaluate the cost to buy the option, in this case it costs 33.67 USD
You do not have to wait until expiry to close the trade. If GBP/USD rises above 1.5800 (strike) the option's value may rise and if the value of the option increases to more than the price paid (33.67 USD) you may sell it at a profit. On the other-hand if GBP/USD does not rise, the option will expire with no value and you will make a loss. This loss is limited to the price paid for the option (33.67 USD), no matter how far GBP/USD falls your loss remains limited and you cannot be stopped-out.
Trading a Downtrend - Buying a Put
If you expect GBP to weaken and/or USD to strengthen, your forecast is for GBP/USD to move DOWN. You may buy a Put option to trade this because a Put gives you the right, but not the obligation, to sell GBP/USD at a specified price over a certain period of time.
As GBP/USD market price falls below the specified (strike) price, the Put option's value rises and you may close the trade at a profit.
The image below shows a GBP/USD Put option to sell 10,000 GBP at 1.5700 over the next 3-days. It costs 33.34 USD to buy this option. If GBP/USD falls below 1.5700 (strike), before expiry, the option's value may rise. If the value increases to more than the price paid for the option, you may close at a profit. On the other-hand, if GBP/USD does not fall the option will expire with no value and you will make a loss. The loss is limited to the price paid at open (33.34 USD).
The content provided is made available to you by ORE Tech Ltd for educational purposes only, and does not constitute any recommendation and/or proposal regarding the performance and/or avoidance of any transaction (whether financial or not), and does not provide or intend to provide any basis of assumption and/or reliance to any such transaction.
Recommended Content
Editors’ Picks
EUR/USD edges lower toward 1.0700 post-US PCE
EUR/USD stays under modest bearish pressure but manages to hold above 1.0700 in the American session on Friday. The US Dollar (USD) gathers strength against its rivals after the stronger-than-forecast PCE inflation data, not allowing the pair to gain traction.
GBP/USD retreats to 1.2500 on renewed USD strength
GBP/USD lost its traction and turned negative on the day near 1.2500. Following the stronger-than-expected PCE inflation readings from the US, the USD stays resilient and makes it difficult for the pair to gather recovery momentum.
Gold struggles to hold above $2,350 following US inflation
Gold turned south and declined toward $2,340, erasing a large portion of its daily gains, as the USD benefited from PCE inflation data. The benchmark 10-year US yield, however, stays in negative territory and helps XAU/USD limit its losses.
Bitcoin Weekly Forecast: BTC’s next breakout could propel it to $80,000 Premium
Bitcoin’s recent price consolidation could be nearing its end as technical indicators and on-chain metrics suggest a potential upward breakout. However, this move would not be straightforward and could punish impatient investors.
Week ahead – Hawkish risk as Fed and NFP on tap, Eurozone data eyed too
Fed meets on Wednesday as US inflation stays elevated. Will Friday’s jobs report bring relief or more angst for the markets? Eurozone flash GDP and CPI numbers in focus for the Euro.