Cable Suffers as Geopolitical Threats in Korea Add Fuel to Brexit Risk

Cable has been in a fairly tight range over the past 6 trading sessions, with the trade-range bound by a 1.3656 high and a 1.3431 low. The market seems to be consolidating recent highs gained after the last Bank of England meeting where the central bank changed its dovish tone for a hawkish one.

The US dollar gained on the Sterling yesterday as geopolitical risk in the Korean peninsula increased with a North Korean official threating to shoot down US planes, and considering President Trump’s words as a declaration of war.

Brexit negotiations continue to weigh on Sterling as Prime Minister May’s speech in Florence, although conciliatory, failed to offer a clear path forward that would benefit the UK. Both factors combined yesterday putting investors in a risk-off mode and selling the pound.

The narrative may change over the course of this week as various events and data releases are scheduled. BoE Governor Carney will be talking on Thursday morning at 09:15 am and Friday afternoon at 3:45 pm. In between those to speeches we will have the scheduled release of UK GDP Growth, for Q2, on Friday at 09:30 am. Expectations are for the final data year on year and quarterly, at 1.7% and 0.3% respectively. Last month’s preliminary data showed forecasts of 0.2% monthly and 2% yearly.

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 figures, such as GDP Growth, 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 rise over the next week then all you need to do is buy a Call option that gives you the right to buy GBPUSD at a set price (strike), for a specific date (expiry), and an amount of your choice.

The screenshot below shows a GBPUSD Call option with a 1.34699 strike, 7-day expiry, and for £10,000 would cost €62.34, 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 turn south again 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.

This screenshot shows a GBPUSD Put option with a 1.34686 strike, 7-day expiry, and for £10,000 would cost €58.63, which would also be the maximum risk.

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