Sterling recorded stellar performance during November, and the currency is still very much holding on to its uptrend. The currency touched the high of 1.35 last week, something that we have talked about in our previous analysis. The rise in Sterling has been very much due to the weakness in the dollar, and there is some element of optimism about Brexit. The options market is giving us a somewhat different message as the put option premium is becoming more expensive, which means that traders are expecting a pullback.
When it comes to Brexit, the UK has signed its first independent trade deal with Japan. The British Prime Minister has talked about signing another major trade deal with Canada, and he believes that he can clinch that deal before the transition period ends. The UK’s transition period is set to run out at the end of this year, and this means that the UK can no longer enjoy the benefit of being part of the EU. The lawmakers in the UK are confident that there are more than 14 trade deals in the pipeline, and the UK will be signing those fairly soon.
Speculators believe that the Sterling will drop once the agreement is signed—a typical scenario of buying the rumor and selling the news. So far, traders believe that the UK will not leave the EU without signing the deal. Hence, leaving the EU with a deal is the base scenario for many traders. Nonetheless, it is imperative to keep in mind that leaving the EU is going to influence the UK’s GDP adversely. In fact, we could see the GDP falling by nearly 4.5%, and if there is no-deal Brexit, then we could see the GDP plunging further by 1.5%.
Hence, traders believe that the Sterling’s current strength against the dollar isn’t going to be here, pushing the premium up for put options.
Sterling-dollar price has recorded five consecutive weeks of gains on the weekly time frame, and it seems like there is no shortage of upward momentum. The price for the pair has cleared a major psychological resistance of 1.35. As for the moving averages, there is no doubt that the bulls are in control of the price as the price is trading above the 200, 100 and 50-week simple moving averages. In addition to this, the 50-week SMA is also trading above the 100-week SMA, which further strengthens the bull case. However, it is important to keep in mind that the RSI, the Relative Strength Index, is still away from its oversold zone.
Chart – Figure 1