The cable (GBP/USD) is currently regarded as a bearish pair, owing to the sharp losses endured by sterling since its April highs. On a rating scale featuring strong sell, sell, neutral, buy, or strong buy, many analysts regard sterling as a sell option. At a level of around 1.35, GBP/USD is significantly higher than its 52-week low of 1.2591, but its almost $0.10 lower than its 52-week high of 1.4377.
Various factors affect the performance of this currency pair, notably interest rate differentials between the United States and the United Kingdom, geopolitical concerns such as the escalating tensions between Iran and Israel, and the impact of dollar strength/weakness on important commodities like crude oil. Each of these factors is particularly important when it comes to apparent trends in Forex trading.
How Do Interest Rate Fluctuations Affect Currency Pair Prices?
When interest rates are rising, so too is interest in the currency. High interest rates in one country are perceived positively by investors and traders from another country. Why? Every time the interest rate rises, it places a premium on the currency in question. Provided inflation is not excessive, rising interest rates will yield positive dividends. In the case of the GBP/USD pair (the cable), the current interest rate in the US is pegged at 1.50% – 1.75%.
Come June 13, 2018, there is a 100% probability of interest rates rising in the region of 1.75% – 2.00%. While marginal, this rate hike will be yet another nail in the coffin of access to cheap capital. Every time the Federal Reserve Bank and the FOMC increases interest rates, the cost of 1 USD increases. The opposite effect is true if the Fed starts cutting interest rates or avoiding the topic altogether.
The US Dollar Index Impacts Forex Rates
The US dollar index measures the strength of the USD against a basket of currencies, notably the CAD, GBP, EUR, JPY, CHF, and SEK. This trade-weighted measure places most of the emphasis on the EUR, JPY, and GBP, but it is a good barometer of the overall strength or weakness of the USD. As such, when the US dollar index is rising, we can assume – all things being equal – that the greenback is strong relative to all currencies.
This may prompt speculators to take long positions on currency pairs such as the USD and short positions on currency pairs like the GBP/USD. Currently, the 52-week range of the DXY is 88.25 on the low end and 99.89 on the high-end. The current trading range of 92.68 is almost half way down the track. The year to date gain for the USD is +0.58%.
Super Thursday in the UK
The Bank of England (BOE) is responsible for setting monetary policy in the UK. Unfortunately for the hawks out there, there is only a 10% likelihood of interest rates rising from their current level next time the BOE meets. The first time the BOE raised interest rates was in November 2017, and many are now beginning to question whether that was a once off event. As the likelihood of a rate hike decreases, so too do prospects for the GBP.
Hedging on FX Trades with Derivatives Trading Instruments
Back in April, sterling hit 1.44 to the USD, and it has tumbled approximately $0.10 since then. For sterling bears, there is plenty to be said about reading market signals correctly. Hamish Cornell of Olsson Capital of the company believes that traders can do well by hedging against losses with derivatives instruments, ‘CFDs or contracts for difference can help you to cover your assets if markets move against you. If you are expecting losses with the cable and it reverses course, you can hedge against that outcome with CFDs. Fortunately, a Forex trader has quite a large bag of tricks available to guard against adverse market movements!’