Getting Pounded
Today's Idea
With the prospect of no interest rate hikes until the end of 2011 at the earliest, some traders may begin to liquidate long positions in the British Pound in favor of potentially higher-yielding currencies such as the Australian or Canadian Dollars. Some traders who are expecting the bearish trend to continue for a few weeks may wish to consider exploring buying a bear put spread in British Pound futures options. For example, with the June Pound futures trading at 1.6205 as of this writing, the June Pound 1.60 puts could be bought and the June Pound 1.58 puts sold for 0.0034, or $212.50 per spread, not including commissions. The premium paid would be the maximum potential risk on the trade, with a potential profit of $1,250 minus the premium paid which would be realized at option expiration in early June should the June futures be trading below 1.5800.
Fundamentals
Officials at the Bank of England (BOE) have a difficult task at hand, trying to keep rising price inflation in check while being careful to not choke-off the fledgling economic recovery. Recent economic data is not helping much. Jobless claims in the UK rose by a larger than expected 12,400 last month, while many analysts were looking for a modest 1,000 claim drop. However, the Consumer Price Index annual rate of inflation for April rose to 4.5%, which is up 0.5% from March's reading. So, the BOE has to decide whether to keep the interest rate at its current low level (0.5%) to help spur the economy or to begin to raise interest rates to try to stem the rising inflation tide. The recently released minutes from the BOE Monetary Policy Committee meeting shows the Bank's officials divided on a course of action, but they are leaning towards continuing accommodative policies. In a vote of 6 to 3, the committee decided to keep rates at 0.5% for the 26th consecutive month and noted that an increase in interest rates given the current economic circumstances would be a major hit on consumer confidence and a determent on the economy. The committee members also noted the rising inflation threat, but believed that there was no sign that it would become entrenched -- especially in wage growth. These rather "dovish" comments have sparked a sell-off in the British Pound vs. the US Dollar (GBP/USD), which is trading at its lowest levels in nearly six weeks. Since reaching its high near the 1.6750 area just over 2 weeks ago, the June Pound futures contract has been in a steady decline and returning back into the consolidation pattern seen on the daily charts for most of 2011. So unless we begin to see some "improvements" in the UK's economic data releases, the June Pond futures may be primed for a test of the psychological support near the 1.6000 level in the coming days.
Technical Notes
Looking at the daily continuation chart for British Pound futures, we notice prices holding below the 20-day moving average for the past several days. The 14-day RSI has started to move sideways, with a current reading of 43.21. There should be some psychological support near the 1.6000 area, but strong support is not found until the 200-day moving average, which is currently near the 1.5920 level. Resistance is seen at the May 11th high of 1.6512.
Mike Zarembski, Senior Commodity Analyst
