GBP/USD Analysis: Bull trap?

The broad-based sell-off in the USD post-Fed pushed the GBP/USD pair to a four-day high of 1.3449 levels. However, the options activity indicates increased demand for downside bets on the GBP. It indicates investors could be worried the post-Fed gains could be transient.  

GBP/USD GBUF8 Open Interest Change: Current (Dec 13 - Prelim) vs. Dec 12 (Source CME)

Call Summary
Total		ITM		OTM
OI	Chg	OI	Chg	OI	Chg
29,168	-49	10,545	9	18,623	-58

 

Put Summary
Total		ITM		OTM
OI	Chg	OI	Chg	OI	Chg
28,944	219	1,835	13	27,109	206

• Despite the bullish move, the open interest (OI) in the GBP puts increased by 219 contracts yesterday. The out of the money puts added 206 contracts.
• Meanwhile, the OI in the GBP calls dropped by 49 contracts.

Clearly, investors are seeking downside protection, which makes sense given the Brexit uncertainty. After all, the British government suffered defeat in a key vote on Brexit bill yesterday. Also, there is a feeling in the market that the Bank of England (BOE) is stuck between the rock and the hard place.

While inflation continues to rise (rose to 6-year high in November), the BOE would still have a hard time tightening the screws courtesy of the economic uncertainty surrounding Brexit.

That said, the price chart analysis still favors the bulls.

GBP/USD Monthly chart

• The above chart shows the doors are open for a rally to 1.3954 (38.2% Fib R). Last month's bullish hammer candle confirmed the bullish view. Also, the current month candle has witnessed a rebound from the ascending 5-MA.

View

• The rise in the OI in the GBP Puts does not necessarily mean the yesterday's rally in GBP/USD is a bull trap. However, it does indicate the investors are cautiously bullish, i.e. seeking downside protection against the long spot positions.
• A break above 1.3550 would revive the bullish move and shall open doors for a rally to 1.3835 (Feb. 2016 low).
• On a larger scheme of things, only a sustained break below 1.30 would abort the bullish view.