Strategic trade
Trade view / 15 July 2016 at 11:18 GMT

Sterling bounce is just a short-term phenomenon

Managing Partner / Spotlight Group
United Kingdom

On July 6 I opened a short position in GBPUSD at 1.2967. (Click here to read.)

The next day the currency pair did decline to 1.2798, however, this was above the first target I set at 1.2513. Now sterling has enjoyed a short boost as the ruling conservative party was able to dismiss part of the uncertainty by filling the leadership vacuum – Theresa May became prime minister on Wednesday evening and has been swiftly appointing a new cabinet.

The bounce in sterling is hurting as this morning my trade is underwater by 3.40%, however, it was always established as a strategic play.

Source: Spotlight Ideas

I am not bailing out of my position as I am taking a longer-term perspective. Yesterday the Bank of England left the base rate unchanged at 0.5%. Do not forget that in July the bank had no effective government to turn to.

Minutes of the monetary policy committee's July meeting showed that most members expected fresh stimulus to be deployed at their August meeting. However, money markets are pricing the chances of a rate cut next by the end of next month at 52%. 

This is down, so pushing sterling, but the bank will not do nothing. I am looking for more quantitative easing. It is just three weeks until the central bank will have the August inflation report to work with.

It was felt that 0.5% was the floor for the base rate, however, post the referendum the economic aspect facing the UK, Eurozone and even the world has been altered. The new Theresa May administration appears to taking a softer tone toward fiscal discipline. This could be mistake if suddenly the treasury is allowed to pedal in tandem with other departments in boosting and directing state expenditure. Governments have a habit of wasting money and I fear that the fiscal discipline that has the UK on a good track may be diluted.

Investment reports suggest that the UK will slide into recession next year, contracting by 1.0% as the impact of Brexit is felt and consumer confidence is hit. The services sector could be singled out, particularly the financial industry and there are doubts as to how many small and medium sized companies have adequate Brexit contingency plans in place.

So I am ready to sell GBPUSD again, as I note that the time technicals are mixed with the very short and very long calling for a string sell and the intermediates saying it is a strong buy. The short view is looking for end of week profit taking. The middle view is giving Theresa May a short honeymoon, and then by mid-August I sense sterling will fall again.

Source: Spotlight Ideas

Management and risk:

Parameters: GBPUSD
Entry: Sell 1.3359 1009 GMT  
Average is 1.3163
Targets: 1.2513 ... 1.2234 ... 1.2008 ... 1.1782
Stop: 1.4000
Time horizon: Strategic trade

— Edited by Clare MacCarthy

Non-independent investment research disclaimer applies. Read more
16 July
OrofitAccumulator OrofitAccumulator
Stephen don't you think the GBP may be forming a Bottom since Brexit with a much bigger retracement ahead ??
18 July
Krunil48 Krunil48
Thank you for the update as I was wondering how you viewed your previous trade and as the political situation had changed.


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