GBP/USD Collapses on BoE Announcement
GBP/USD collapses following the Bank of England interest rate announcement. Monetary policy is left unchanged and the committee voted 8 versus 1 to keep rates on hold. The market's reaction, with such a dramatic fall in the GB pound, may be based on indications that the BoE will not hike rates early next year. Next up, the BoE Governor Carney is due to make a stated at 12:45 BST his comments will be closely watched and are likely to cause more activity in the market.
In the meantime the pair trades at 1.5480, heading towards its initial support level at 1.5470. See chart below.
Trading Over News Annoucements:
If you expect GBP/USD to continue falling over the next few days, you may buy a Put option which gives you the right to sell at a certain level for a certain period of time. Hence, if the pair falls further via your put you have secured a higher price and you may profit.
For example, the trade below is a Put option to sell 10,000 GBP at 1.5470 over the next 4-days. The option costs a premium of 60.33 USD which is also the maximum risk. If GBP/USD breaks-through its support level , expiring below 1.5470, then the option may profit. If the pair does not fall then a limited loss is incurred.
If you expect Carney to reassure the markets and GBP/USD to rebound-up, you may buy a Call option which gives you the right to buy at a certain level for a certain period of time. If the pair rises, via your call you have secured a cheaper buy price and you may profit.
For example, the trade below is a Call to buy 10,000 GBP at 1.5500 over the next 4-days. It costs a premium of 73.12 USD to buy this option. If the pair rises above 1.5500 by expiry the option may profit. If the pair does not rise a loss is incurred and loss is limited to the premium paid at open (73.12 USD).
We also have Non-Farm Payroll data from the US tomorrow which notoriously causes volatility in the markets. Buying options may be a useful trade when trading over news announcements and high volatility since when holding an option you cannot get stopped out and at the same time risk is limited.