Will The Pound Get Pounded?
British pound futures have been declining against the US dollar since November 2007. Over that period the pound has fallen from a high of over $2.10 US dollars per pound to near $1.32 dollars per pound today. The Brexit vote in late spring of 2016 pushed the value of the pound below, what was then, the psychologically important $1.35 level to new lows. Nevertheless, in the context of the vote and its broad implications, the move lower since Brexit has not been as significant as some expected.
We will leave comments on Brexit politics to the more informed and those who have more of a vested interest in the outcome. From a technical, longer-term perspective, we see the pound continuing its decline versus the US dollar, with important resistance at the $1.35 level, along with a key downtrend line.
From a short-term trading perspective, our Options Sentiment Indicator is flashing an over-bought signal and potential lucrative trading opportunity. A similar over-bought signal was seen throughout January and correctly predicted the sell-off in advance of February options expiration, as shown below.
It is important to note:
- Perhaps due to the volatility regarding Brexit, the British pound has the highest relative options open interest on the CME futures exchange of any currency futures.
- CME futures currency options expire this Friday, March 8th.
- The CME currency futures active contract will roll from March to June later this month.
As shown above, our proprietary model and Final Price Magnets have done an admirable job of predicting the options settlement price of GBPUSD in 6 of the last 7 months. Currently, the model is telling us the pound could experience a significant mean-reversion correction this week. Given the news surrounding Brexit, anything is possible. That said we anticipate a good dose of volatility in the British pound this week.