Since the beginning of September, the British pound has strengthened against the US dollar by almost 10 percent, which in the realities of the currency market is a very significant change in value. As a result, the GBP/USD currency pair, exceeding 1.3100, reached the highest level since May this year. The pound thus became the strongest among the world's major currencies in the last quarter of this year and last half-year.
We would like to remind you that on December 12, which is equal in a week, elections will be held in Great Britain, which is the number one political event for the fate of the endless Brexit. Pre-election polls indicate that the Tories (Conservative Party) enjoy a steady advantage before the election and have a chance of an undefeated victory. Hence, investors assume that the result of next week's election could be market-friendly and already seem to discount this fact by buying the British pound in the broad market. The average of the last five polls shows support for the Conservative Party at 44 percent, and for the Labor Party at 33 percent. As a result, uncertainty has also been reduced as to whether Prime Minister Boris Johnson will manage to push through an agreement on Brexit through parliament.
On the currency options market, two-week implied volatility has risen 12 days in a row, which is a historic record and underlines the importance of the upcoming elections. Interestingly, investors in the options market, despite the increase in the GBP/USD exchange rate, hedge against the negative scenario and the weakening of the pound. This can be demonstrated by the clear demand for put options relative to call options. Buying the put option involves the possibility of achieving potential profit when the underlying instrument price drops, in this case, GBP/USD. Meanwhile, buying a call option allows you to achieve potential profit when the underlying instrument price increases within a certain period of time.
GBP/USD monthly chart. Conotoxia trading platform.
From the chart perspective, after establishing a potential double bottom formation, the GBP/USD exchange rate approaches the resistance set by the March 2019 high. This area may be the first important test for the determination of British currency buyers. The next resistance, in the long term, seem to be the highs of January and March 2018.
Daniel Kostecki, Chief Analyst Conotoxia Ltd.
Materials, analysis and opinions contained, referenced or provided herein are intended solely for informational and educational purposes. Personal Opinion of the author does not represent and should not be constructed as a statement or an investment advice made by Conotoxia Ltd. All indiscriminate reliance on illustrative or informational materials may lead to losses. Past performance is not a reliable indicator of future results.
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