On the basis of strong US employment data and weak consumer spending in the UK, in our August 9th report, we had forecast the GBPUSD pair to decline from a level of 1.3020. We had also mentioned our interest to open a short position in the Forex market and invest in a put option. Both trades were wound down in profit, as the pair plunged to a low of 1.2830 in a week’s time. We anticipate the GBPUSD pair to decline further from the current level of 1.2850, due to the reasons given below.
The next round of Brexit talks is slated to begin by August end. On Monday, the UK government produced its first position paper. However, it was welcomed with skepticism as the contents were not convincing to the European negotiators. Additionally, it took five months for the UK government to prepare the position paper.
Both the UK and EU have diametrically opposite views with regard to the manner in which the Brexit negotiations are to be carried out. While the UK prefers negotiating multiple issues (citizen rights, trade deals, Irish border, separation bill, etc.) at the same time, the EU prefers to sort out the issues one by one. The EU currently has an upper hand.
The EU exports goods worth about €314 billion to the UK. It is more than what the EU ships to BRIC countries combined. As of now, there is no certainty that issues will be quickly resolved, and the Forex market does not like uncertainty. That would keep the Pound weaker.
On the other hand, the weakness in the US dollar was mainly due to doubts over the possibility of another rate hike in 2017. The US dollar was also under pressure due to a weaker than anticipated inflation for July. However, David Kohl, chief currency strategist with Julius Baer, believe that inflation would pick up going forward.
The argument is based on the fact that wild swings in energy prices at the end of 2016 is still having its effect on inflation and so it has become difficult to assess the exact underlying inflation trend. However, Kohl points out that the wage dynamics remain strong and that would encourage the Fed to raise interest rates in December 2017. Thus, we anticipate the GBPUSD pair to decline further in the days to come.
The GBPUSD pair is currently declining on the daily chart, after breaking below the support level of 1.2980. The next major support exists at 1.2750, as shown in the chart below. Furthermore, the stochastic oscillator is in the bearish zone. Thus, we can expect the pair to move down and test the next support level.
The analysis can be used to gain from the market by opening a short position in the GBPUSD pair near 1.2850. While opening a short position, we would also place a stop-loss order above 1.2940. The short position would be covered when the pair reaches a level of 1.2740.
In addition to a short position in the spot Forex market, we are also planning to buy a put option to generate returns from the predicted downtrend. Before proceeding further, we would like to make sure that the option remains valid for one week and the pair trades near 1.2850 in the OTC market.
Disclaimer: Any financial trading analysis offered here is our opinion and is not intended as advice or direction for investors. We cannot guarantee the success of any trades made as a consequence of this article, and we encourage traders to incorporate a strong money management strategy to limit losses when they enter the markets. Please use this article as part of your own research before formulating strategies prior to trading.
