Bears Getting Pounded!
Fundamentals
British Pound futures has been one of the beneficiaries of a weak U.S. Dollar the past several weeks, rising over 20 cents vs. the beleaguered greenback since the March lows were made at 1.3653. However, the bullish tread may be in jeopardy, as Standard & Poor's (S&P) has lowered its outlook on Great Britain to "negative" from "stable", citing rising government debt which is now approaching 100 percent of the country's gross domestic product! This has increased the chances that S&P will lower the country's credit rating from its current "AAA" status. If this were to occur, Britain would join Ireland, Spain, Portugal, and Greece, who all had their credit ratings cut this year. The increase in government debt came about as the recession hit the country hard, with housing prices falling rapidly as unemployment increased. The U.K. has also had to deal with the losses within its own banking industry, with S&P estimating that the British government will need to spend 100 billion to 145 billion Pounds to help shore-up bank balance sheets. If true, this could total as much as 10% of this year's gross domestic product (GDP). This news initially caught traders off guard and sparked an initial round of selling, with the June futures falling over 200 points minutes after the announcement. However, prices begin their recovery going into the New York opening, as U.S. continuous jobless claims rose to another record high. Part of the intraday Pound rebound vs. the U.S. Dollar could be tied to traders' fears that the massive increase in U.S. government spending may force the credit agencies to look at U.S. Government debt for a possible downgrade as well. This is something that just a few months ago was nearly unthinkable, but now adds another potentially bearish scenario for the already beleaguered Dollar.
Trading Ideas
Traders who believe the British Pound is due for a near-term correction but may continue to gain vs. the USD could possibly look to the British Pound futures options market for possible trade ideas. An example of one potential trade would be to buy 2 July Pound 160 calls and sell 2 165 calls. With the September Pound trading at 1.5715, the call spread part of the trade could be bought for 1.24 points or $1550. Those expecting a correction may wish to consider waiting for a further pullback in the Pound before trying to enter a trade such as this. The premium paid would be the maximum loss on the trade.
Technicals
Looking at the daily chart for the June British Pound, we notice the market continues to hover near overbought territory, with the 14-day RSI near the 70 level (readings over 70 are considered overbought). Prices are above the 20-day moving average and hovering right near the 200-day MA. A weekly close over the long-term MA would be considered a very bullish scenario. The next major resistance level for the June contract is at the 1.6000 area, with support seen at the 20-day MA near the 1.5100 area.
Mike Zarembski, Senior Commodity Analyst
