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Where Will The Sterling Crash Stop? How Can GBPUSD Options Be Traded? -

Oct, 07th 10:30

The British Pound continued to head down against the U.S dollar after some corrective moves following a flash crash in early Asian trading hours. The pair GPBUSD is on the brink of the biggest one-week loss since June 24, as uncertainties tied to the departure of the U.K from the European Union triggered a selloff in the GBP earlier this week.

Last weekend, Prime Minister Theresa May said she would begin a two-year period of negotiations related to the U.K.’s withdrawal from the EU by the end of March. The Sterling came under renewed pressure as markets expected that the divorce would cost the economy more than initially expected.

Recent data released since the referendum in June have portrayed a bright picture of the EU’s second largest economy with all three core sectors – manufacturing, construction and services pointing to an expansion. However, economists have claimed that consequences of the hard “exit” are yet to come.

Recently, European leaders have raised their voice to support a tough exit process for the U.K. This posture is being adopted in order to preserve the fundamental principles of the single market and prevent other EU members from following the U.K’s example and attempt to leave the bloc.

German chancellor Angela Merkel on Wednesday hardened her position, saying that a “comfortable” negotiation could undermine basic single market principles, such as freedom of labour and capital movement. Echoing Markel’s remarks, French President Francois Hollande on Thursday urged the bloc to press for a tough deal with the U.K to avoid contagion.


Adding to the downside triggers for the GBP, a train of U.K economic data published today fell shy of expectations.  According to the U.K. Office for National Statistics, manufacturing production rose less than expected in August, while industrial production registered a surprise decline.

Official data showed that manufacturing production increased by a seasonally adjusted 0.2% in August, following three months of declines. On a yearly basis, manufacturing production rose at pace of 0.5% compared to August 2015, missing forecasts for a 0.9% increase.

The report also indicated that industrial production unexpectedly fell by a seasonally adjusted 0.4% in August, in contrast to expectations calling for a 0.1% rise. Year-on-year, industrial production added 0.7% in August, which was below expectations of a 1.3% increase.

Markets are focussing their attention on the monthly U.S Payrolls Data which will be released later today. Data on the number of new jobs added, the unemployment rate and average hourly earnings are considered as one of the keys to assess the possibility of a Fed interest rate hike at the end of this year.

Besides the important NFP report, a number of Fed officials including Cleveland Fed President Loretta Mester and Fed Vice Chairman Stanley Fischer are scheduled to speak later today. The second presidential debate between Hillary Clinton and Donald Trump will take place on Sunday. The US markets shall be closed on account of the Columbus Day holiday on Monday.


Fig: GBPUSD D1 technical chart

GBPUSD fell out of the range between the support at 1.28500 and the resistance at 1.344300 which had contained the pair since June 24, to hit a new multi-decade low today. Although the market has entered the oversold zone with RSI plunging to as low as 20.48, there is no sign of a pull back so far. GBPUSD is expected to slide lower and may find support at around 1.12000.

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