Love or Hate Brexit - It Keeps Surprising Traders
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In last week’s update I had highlighted the FX options activity and reading in USD/CHF as part of the trade selection process. The data, as well as the technical backdrop suggested that prices were poised to move lower. They did initially, but recovered a bit and essentially have shopped back and forth since.
For today I want to look at the FX options market once again to assess a short trade in GBP/USD.
You might be asking yourself,
“If the options market is THAT bullish and the move higher that began on Thursday October 10th for nearly 500 pips, why on Earth are considering shorting GBP/USD?”
If you look at the above chart and note previous spikes higher above the ZERO line: Jan 2008, June 2009 and January 2018 you will notice that by and large GBP/USD spot prices reversed lower in the days/week ahead.
The 1.2700 area has acted as resistance, which is no surprise. That area has been key support and resistance a few times since 2016.
I want to be clear, I am not suggesting that GBP/USD is due for a big move lower, although that is possible given the headline risk. All I want to get across here is that in the short to medium-term prices are more likely to move lower. Think of it as a rubber band: prices have been stretched to the upside in this case and the market is seemingly heavily positioned in one direction. This is when you can sometimes see very robust moves in the opposite direction.
Be nimble.
If prices were to move back below 1.2470 then the move lower likely has legs and 1.2700’ish will be yet another failed break-out attempt.
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