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.
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 trades weak below 1.0800 amid Good Friday lull, ahead of US PCE
EUR/USD remains depressed below 1.0800 after soft French inflation data, amid minimal volatility and thin liquidity on Good Friday. The pair keenly awaits the US PCE inflation data and Fed Chair Powell's speech for fresh hints on next week's price action.
GBP/USD holds steady above 1.2600 as markets stay calm on Good Friday
GBP/USD trades sideways above 1.2600 amid a typical Good Friday trading lull. A broadly firmer US Dollar could keep any upside attempts limited in the pair ahead of the US PCE inflation data and Fed Chair Powell's appearance.
Gold price sits at all-time highs above $2,230, US PCE eyed
Gold price hit all-time highs at $2,236 on Thursday to finish Q1 2024 with a bang. Most major world markets, including the US are closed due to Holy Friday, leaving volatility around Gold price highly subdued. US PCE inflation and Powell are awaited.
Jito price could hit $6 as JTO coils up inside this bullish pattern
Jito (JTO) price has been on an uptrend since forming a local bottom in early January. Since then, JTO has revisited the key swing point formed in early December, suggesting the bulls’ intention to move higher.
Key events in developed markets next week
Next week, the main focus will be inflation and the labour market in the Eurozone. We expect services inflation to be impacted by the easter effect, while the unemployment rate to be unchanged.