Will GBP/USD Heat-up after Fed Meeting?
GBP/USD shed 4% of it’s value before hitting 1.5170 support. Last week, support held and the pair bounced back to trade in the 1.54’s. The downtrend can be put down to weakness in GB pound on concerns of how well the British economy was actually doing and that a slowdown could seriously reduce chances of an interest rate hike in the UK. The prospect of higher interest rates had been driving the pair to its most recent high at 1.5818. More light may be shed on Wednesday with the release of UK unemployment rate and claimant count. Also, GDP has been falling over the previous two quarters and the next data is expected for release on 30th September. Both numbers will need to show signs of a strong economy, that is to say lower unemployment and higher GDP.
If you think GBP/USD will be heading further south over the next days then you may purchase a Put Option which gives you the right to sell at a certain price (strike) at a set date (expiry). The image belows shows a Put option to sell 100,000 GBP at 1.5400 (strike) until Friday 18th September (expiry). It costs a 520 USD premium to buy this option which is also your maximum risk.
If GBP/USD falls below 1.5400 by expiry the option will payout. For example, if the pair moves down to 1.5170 (230 pips lower) the option will payout 2300 USD. If the pair does not fall then the option will not payout and you will lose the 520 USD premium paid.
The Fed (Federal Reserve) meeting on Thursday may prove the biggest market driver this week, where a decision will be announced on a possible interest rate hike. Until a few weeks ago the market consensus was predominantly leaning toward a rise in interest rates. Poor US economic data for job growth (Non-Farm Payroll) and low inflation pressure seem to have put that idea on the ice and the Fed is expected to keep rates on hold. However, as nobody can really anticipate what Fed Chairwoman Yellen may choose to do or say, the possibility of a hike is still there. The markets may begin to trade sideways, within a range, leading up to the interest rate announcement. Once the decision is made we may see some movement again. GBP/USD may decline sharply if there were to be a hike, but it may also continue its decline if the wording from the press statement encourages the market to think that a hike will come very soon. There has been talk that the Fed could call an extraordinary meeting in October to make an interest rate decision to raise.
On the other hand, if the perception of the market is that the Fed will delay an interest rate hike decision until December or beyond the pair could move higher. In this case if you think the next move for GBP/USD will be up, to profit from this scenario you may purchase a Call option which gives you the right to buy at a certain price (strike) until an expiry date. The image belows shows a Call option to buy 100,000 GBP at 1.5430 (strike) until Friday 18th September (expiry). It costs a 650 USD premium to buy this option which is also your maximum risk.
If GBP/USD rises above 1.5430 by expiry the option will payout. For example, if the pair moves up to 1.5630 (200 pips higher) the option will payout 2000 USD. If the pair does not rise then the option will not payout and you will lose the 650 USD premium paid.
Looking at the candle-bar Daily chart, the pair would seem to be in a bear trend, with price still below the Ichimoku cloud (vertical blue and pink lined area). Price action is very close to the cloud, which acts as a resistance level. The market has been range bound between two Fibonacci lines for the past two days, 38.2 and 50 (black horizontal lines), which represent technical support and resistance levels in a retracement. Price action will need to close above the cloud for the Bull trend to be confirmed.