Cable Rally Stutters as BoE Change of Stance Wears-off on Investors

Last Thursday’s Bank of England statement after the scheduled MPC meeting showed there was a change of mind as to how likely an interest rate hike could be in the near future. The hawkish stance,rather a surprise, was also strengthened by board member DrGertjanVlieghe, who previously held a dovish view. The new stance gave Cable a boost sending price from levels below 1.3250 before the central bank meeting, to close last Friday at 1.3586, levels not seen since before the Brexit referendum.

While the UK seems likely to raise rates in the short term, from the US the Fed has been giving signals that, despite a strong economy and jobs growth, weak inflation rates may mean there is still a need to keep interest rates on hold before continuing monetary tightening. The dollar had already been weakening and looks set to weaken further unless there is more economic information that may sway the Fed’s mind

This evening at 7 pm we should get more information as to how the Fed sees the economy and its current monetary policy. The FOMC will be holding its regular press conference, rates are expected to remain unchanged; while the market will be watching carefully as Fed Chair Yellen makes her statement.

The main advantages of using an option compared to opening a Spot position comes in the reduction and mitigation of risk.  Buying an option may be cheaper than the cost of your stop loss if it is reached. Bear in mind that after big events, such as an FOMC meeting, the market may experience extreme increases in volatility therefore stop losses must be very wide and can be expensive. Stop losses may not always be closed at the price you placed as a stop. In a Fast market, typical after a surprise in important data releases, the price you are stopped at may differ considerably. With options that simply cannot happen, the cost of the option is your total risk when buying.

If you feel that Cable will continue to rally over the next week all you need to do is buy a Call option that gives you the right to buy GBPUSD at a set price (strike), specific date (expiry), and for an amount of your choice.

The screenshot below shows you that a GBPUSD Call option with a 1.35217 strike, 7-day expiry, and for £10,000 would cost €77.04, which would also be the maximum risk.

This screenshot shows the profit and loss profile of the above Call option, just click the Scenarios button.

On the other hand, if you feel that Cable will continue south then all you need to do is buy a Put option which gives you the right to sell GBPUSD at a set strike, expiry and amount.

The screenshot below shows that a GBPUSD Put option with a 1.35216 strike, 7-day expiry, and for £10,000 would cost €74.63, which would also be the maximum risk.

This screenshot shows the profit and loss profile of the above Put option.