SNP Investments Lays Out the Case for Options On The GBP/USD

It’s the end of Q3 2017 and markets are taking stock of the latest quarterly performance. In Europe, a substantial recovery has taken place heading into September 2017. Between the CAC 40, DAX 30, and the FTSE 100 index, it has been the latter index that underperformed. Closing out the month of September, the world’s premier indices were trading as follows:

• Dow Jones – 22, 364.28 up 2.28% over 1 month
• S&P 500 – 2,517.34 up 2.90% over 1 month
• NASDAQ – 6,493.40 up 3.04% over 1 month
• FTSE 100 – 7,372.76 up 0.48% over 1 month
• DAX 30 – 12,828.86 up 7.39% over 1 month
• CAC 40 – 5,329.81 up 5.92% over 1 month

In percentage terms, it was the DAX 30 in Germany that generated the strongest returns in September, helping to fuel an EUR rally in the markets. The weakest performing index was the FTSE 100, up just 0.48% in September. However, this is the result of a strengthening GBP. For the year to date, the GBP/USD currency pair has moved from 1.23 on January 2, 2017 to its current level of 1.3393. The currency has retreated since September 18 when it hit 1.36 to the greenback, but remains near the 1.34 range. The 52-week low for the GBP/USD is 1.19952, and the 52-week high is 1.36158.

The performance of the FTSE 100 index – the leading UK index is inversely correlated with the strength of the GBP. When the sterling is appreciating, the foreign-generated revenue streams of FTSE 100 index companies are worth relatively less in GBP. This is true because more foreign currency is needed to purchase the equivalent 1 GBP. The recent appreciation of the GBP/USD pair dovetails with a declining FTSE 100 index. The stats confirm this: for the year to date, the FTSE 100 index began at 7,177.90, hit a low of 7,099.20, and hovered between 7,233.33 and 7,466.67, settling in the midrange at 7,372.76. The FTSE 100 index reached 7,542.70 on August 8, 2017, but has retreated sharply since then.

Good and Bad News for the GBP/USD Pair

From a positive perspective, there are several things that can cause the GBP/USD pair to rally. These include weak economic data from the US side, and strong economic data from the UK side. Recently, Bank of England governor, Mark Carney indicated that the bank rate could rise if the UK economy remains on track. At the press conference, the GBP/USD pair was trading around 1.3402.

According to Carney, “The majority of the Monetary Policy Committee (MPC) say it may be appropriate to raise interest rates if the economy stays on track.” The BOE governor was quick to point out that any increases to the bank rate would be gradual and limited. According to stock charts, the GBP/USD pair has a 5-day moving average of 1.3393, (a buy), a 10-day moving average of 1.3392, (a buy), and a 20-day moving average of 1.3408, (a sell). Over 50, 100 and 200 days, the moving average indicators are sell options.

SNP Investments specialist Santos Malten Jr. believes that the recent spate of economic data releases has hurt the sterling and will cause a depreciation of the cable heading into October. According to the official data, the GDP slowed to just 0.3% quarter on quarter between April and June. That amounted to a 1.5% growth rate, as opposed to the 1.7% forecast. Of equal concern for the UK economy is the rising current account deficit, currently at £23.2 billion.

On a positive note, the M4 Money supply, the Bank of England’s consumer credit, and business investment were all positive. "Based on the economic data, we can expect the GBP/USD pair to remain at the mid-1.30s level as we start Q4 2017. Any positive developments with the US economy will invariably strengthen the USD and weaken the cable further. A rate hike in November seems unlikely, but a 25-basis point movement by the Fed on December 13 is widely expected."

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