The GBP has long held the mantle as one of the most stable currencies in Europe, and indeed the world. The United Kingdom can certainly lay claim to a structurally sound economy, and the currency reflects as much. From a strategic perspective, I would recommend going long on the GBP against the USD. If you gauge market sentiment, you will see that most traders are going long on this particular currency pair (over the long-term), and it is at its highest level since April trading when it was $1.46. But something interesting been happening over the past couple of days – the GBP/USD currency pair has been falling for several consecutive sessions. This marks the longest-running losing streak for the Sterling in 6 years. Sensible advice is the following:

  • Strategically, the GBP/USD is a call option (up to a year or more)
  • Tactically, the GBP/USD is a put option  (days and weeks ahead)
  • What is Causing Short-Term Weakness in the GBP?

    It is clear that multiple factors are weighing heavily on the pound. These include poorer Purchasing Managers’ Index data in services, manufacturing and construction. On 18 September 2014, a referendum on Scottish independence was held and the majority decision remained in favour of union with the UK. However, a new survey conducted by STV (Scottish broadcaster TV) now reflects that the majority of Scots are in favour of independence. This is also adding downward pressure on the GBP. The British Prime Minister – David Cameron – is now compromising on the question of UK membership in the European Union. It is expected that the referendum question will be: Does Britain wish to remain in the EU, or leave the EU?

    These issues are important determinants of global sentiment vis-a-vis the GBP. Negative responses such as a UK departure from the EU, Scottish independence and declining economic data naturally affect the strength of the British currency. As a trader it’s all about looking for opportunities in the short-term to profit off the volatility. The aforementioned factors are definitely negative and have a bearish effect on the currency. Outside of the UK, the September 16-17 FOMC meeting is the most pressing issue for the GBP/USD currency pair. As expectations of a rate hike in the US increase so the GBP will weaken. Should key individuals like Janet Yellen or Stanley Fischer make comments to the contrary, the GBP/USD currency pair will appreciate. My feeling is that the likelihood of a rate hike is higher now than it was a week ago, although I would not describe a rate hike as a certainty just yet. In terms of trading decisions – put options on the GBP/USD currency pair are definitely gaining favour with traders.

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