Yesterday saw a tremendous upsurge in the pound. Whether this upsurge was an over-reaction to the ongoing Brexit news being released on a daily basis or a true stabilizing of the pound, is unclear as of yet.
Tuesday saw a 300-pip rally, which has so far led to the pound holding a neutral position today. Conventional Wisdom is that the position that Prime Minister Theresa May has taken calling for a snap general election may have contributed to yesterday’s surge.
To that point, investors are counting on the PM developing a stronger mandate to secure the UK’s European Union exit and that she will be able to push back established deadlines for trade deals until the 2022 election cycle.
GBP vs. Brexit
At this point successful currency managers are wondering what type of trade deals the UK will secure with the EU. For that reason, it could be argued that Tuesday’s upsurge in the pound may have been a bit of any over-reaction.
It is also likely that when you consider that financial (currency) speculators had held record net short positions in the GBP previously, the move higher was undoubtedly fuelled in a big way by short-covering as the GBP/USD moved outside of their recent trading positions.
Now the question is will these speculators aggressively change their GBP holdings in a significant manner? When you consider that the GBP no longer appears to be as undervalued as it did a few months ago, a “pullback,” of some type may again present the GBP in an attractive light again!
No doubt, the Brexit negotiations and turmoil caused by those efforts still makes the GBP a tough currency to predict trajectories on. More will be known in the coming days thus helping to provide clarity on the short-term anticipated movements for the GBP.
GBP vs. Greenback
It is expected by international currency players that the GBP is still expected to trend downwards for the long-term against the USD. It cannot be understated just how important a hawkish central banking system effectively supports the Greenback.
For that reason, most foreign currency exchange entities believe that if a more sustainable rally for the GBP against the USD were to take place, there would need to be a significant change in the interest rates in the UK and/or in the US. Put another way, the Bank of England will be forced to be more vocal about tightening its currency policies and/or the US FED will need to drop its openly hawkish position as well.
As there is no current sign that either banking entity is willing to entertain such thoughts, we may expect currency speculators to once again take a bearish position on the GBP positions in the coming weeks. Having said that, many currency management groups believe that the pound will come under pressure again…but with a bit more room to go on the upside before it does so.
Based on yesterdays currency movements, MosaicaFX believes that this may be a good time to consider using options to help protect profits and short-term currency strategies. As the RSI indicator moved north of 70 on Tuesday, it is possible the GBP/USD was slightly overbought in the short-term.
While this does not presume another collapse is imminent, it does indicate that exercising options with these currencies could be well conceived. Our suggestion would be for you to contact your MosaicaFX Account Managers and let them review your current currency portfolio. Based on the strong performance of Tuesday and the latest information coming out of the UK today… taking such steps could be timely.
Contact us today and let us see what we can do to help you protect your profits with such options. As we stated in an earlier article, we will continue to monitor this highly fluid situation coming out of the UK to provide up-to-date guidance regarding the GBP.