Opinions Differ on Rate Increases by the Bank of England
Today's Idea
With little chance of a major change of policy by the Bank of England and the April British Pound options expiring in less than 2 weeks, some traders who are expecting the June British Pound futures to continue to remain range-bound may wish to explore selling strangles in the April options with call strike prices above resistance at 1.6385 and put strikes below support at 1.5734. For example, with the June Pound trading at 1.5995 as of this writing, the April Pound 1.6400 calls and the April Pound 1.5600 puts could be sold for about 0.0020, or $125 per strangle, not including commissions. The premium received would be the maximum potential gain on the trade which would be realized at option expiration should the June futures be trading above 1.5600 and below 1.6400. Given the risks involved in selling naked options, some traders may wish to have an exit strategy in place should the position move against them. An example of one such strategy would be to buy back the strangle before expiration should the June Pound close above 1.6400 or below 1.5600.
Fundamentals
Will they or won't they? That is the question many traders are asking about any interest rate increases by the Bank of England (BOE) in the near future. There appears to be a difference of opinion among BOE members regarding interest rates. In the first place, Monetary Policy Member Adam Posen is looking for the BOE to increase its quantitative easing policy even further in order to help the private sector rebound from its economic malaise. On the other side of the coin is the view held by Andrew Sentance, who believes that rates should be raised soon in order to fight rising inflation. Mr. Posen's "dovish" stance is based on his belief that government austerity measures will slow consumer spending in the future, which in turn will ease pricing pressures and keep inflation tame going into 2012. This view contrasts with current inflation levels which are running at 4.4%. It is this much higher inflation rate that is causing the "Hawk" on the BOE Monetary Policy Committee to want to increase interest rates to help stem further pricing pressure tied to an overly "accommodative" monetary policy. This division has kept the British Pound trading in a relatively narrow price range for most of 2011, as many traders remain hesitant to take bullish or bearish positions until some clarity of policy is seen from the BOE members. Given the mixed economic data lately, it may not be until later this year before the BOE is forced to seriously consider any rate hikes, unless inflationary winds blow even stronger than current levels.
Technical Notes
Looking at the daily continuation chart for the British Pound futures, we notice prices have moved into a consolidation mode, trading in a relatively narrow 600-pip range since the end of January. The major moving averages also paint a mixed picture, as prices are above the longer-term 200-day moving average, but below the short-term 20-day averages. The 14-day RSI has turned moderately negative, with a current reading of 42.72. Bulls would need to see a close above major resistance at 1.6385 to gain control, while Pound bears would need to see a close below support at 1.5745 to have the upper hand.
Mike Zarembski, Senior Commodity Analyst
