Interest Rate Week – GBP/USD Trade Idea
16-09-24
Markets are braced for crucial interest rate decisions from the Federal Reserve (Fed) and the Bank of England (BoE) scheduled for 18th and 19th September respectively. These decisions are expected to set the tone for the GBP/USD exchange rate in the coming months, with significant implications for inflation, growth, and financial markets worldwide. We also await Japan’s interest rate decision on Thursday night, which could set the tone for Friday’s markets and into the weekend.
In the U.S., the Fed is nearing a crucial decision, and opinions are divided on whether it will reduce its key interest rate by 25 or 50 basis points. Futures markets have gained momentum, now indicating a 60% likelihood of a larger 50 basis point cut. Additionally, projections suggest there could be a total of 120 basis points in cuts by the end of the year.
In the U.K., the BoE is not expected to lower interest rates during Thursday’s meeting. A recent Reuters survey of 65 economists revealed unanimous expectations that it would maintain its rate at 5%, though market indicators show a 31% chance of an unexpected cut. Inflation data due on Wednesday could further clarify the situation.
Meanwhile, the Bank of Japan is expected to keep its policy unchanged on Friday but may signal plans for tightening in October. On the 31st July, the Bank of Japan unexpectedly raised interest rates by 15 basis points, to 0.25%, with the Japanese index – Nikkei 225 – recording its worst day in 37 years. The surprise increase in interest payments led to the unwinding of a large quantity of long US equity positions investors had created using borrowed Yen.
The CME Volatility Index (VIX) rose by 135% in three trading sessions to an intra-day peak of 65.73 on 5th August, alongside the 6% fall in the S&P500 index over the same period. Any movement on this Friday’s rate decision could have a big impact on the markets.
If you agree that uncertainty surrounding this week’s central banks’ rate decisions will spark a rise in GBP/USD volatility, you may consider buying a long strangle.
Long Strangle
Trade Idea
Underlying GBP/USD Dec 24 Future Price = $1.3203 (as of 16/09/2024 at time of writing)
Buy: 1 (number of contracts) x $0.0047 (contract price) x $62,500 (contract size) = $293.75 debit
Buy: 1 (number of contracts) x $0.0043 (contract price) x $62,500 (contract size) = $268.75 debit
Total consideration of $562.50 (excl. fees + commissions)
Defined risk profile – maximum loss is equal to the net option premium paid (+ fees and commissions)
This strategy will break even if GBP/USD Dec24 Future Price = 1.3390 or 1.3010 at expiry on 04-Oct-2024
Maximum loss $562.50 (excl. fees + commissions)
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