Strategic trade
Trade view / 06 July 2016 at 12:24 GMT

Sterling is sliding down a slippery slope

Managing Partner / Spotlight Group
United Kingdom
Instrument: GBPUSD
Price target:
Market price:

Sterling extended losses to fresh 31-year lows against the US dollar over the past 24 hours as fears over the consequences of the Brexit vote on the UK economy grew stronger following remarks and policy changes by the Bank of England yesterday.

GBPUSD tracked lower to 1.2797 during Asian trading. This marks the lowest level for this currency pair since September 1985.

The UK unit has been under severe pressure since the polls closed on June 23 when the electorate decided that the nation should leave the European Union (EU).


Source: Spotlight Ideas                                                                                                           
The time based technicals are split and as one might expect the short-term measures are either neutral or biased toward buying sterling in the belief that in the very near term the selloff in Asia was overdone and that sterling for now is oversold. 

However, I am not looking to trade GBPUSD on a short-term will be too time consuming and transaction costs are likely to erode a good deal of short-term gains.

Instead I am looking to side with the time technicals that extend from five hours and one month plus...these all suggest that one should be a strong seller of sterling relative to the dollar.

Sterling has lost more than 14% of its value since the June 23 referendum and it is highly likely that the Bank of England will cut the base rate by at least 25 basis points and expand the quantitative easing purchase programme.

This has to be paired with the lack of political leadership in the Conservative government and an ineffective and divided opposition. The net result is that sterling will decline over the summer and into autumn.

Source: Spotlight Ideas

Management and risk:

Parameters: GBPUSD
Entry: Sell 1.2967 12:52 BST
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
Philidor Philidor
I have to agree, this is a very sensible trade!

As someone who trades with options frequently, I'm tempted to buy a put outright, or a spread, when looking at such a wide stop. The stop loss above is at about 0.100 distance, while you can get a November-1 put with strike 1.28 for about 0.035, or a spread in the 1.28-1.20 range or thereabouts for 0.020. This is tempting because it would allow you to increase the position size significantly - though of course the risk of taking a loss with sterling merely remaining at current levels is thrown into the mix.

What do you think?
Philidor Philidor
Correction, the spread comes in at 0.025 or so. I was looking at the asking price!


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