Having a strong hunch that the BOE rate decision will be a volatile event, I decided to place a straddle trade at about 6:50pm: –
Spot: 1.5600
Stop if Bid; 1.5630, SL 1.5600
Stop if Offered; 1.5570, SL 1.5600
It was no surprise when the decision was announced, where the rate was held at 0.50% and asset purchase maintaining at 375Bn.
What is more important is what Carney is going to say. I was of the opinion that he would talk the GBP up as the UK wanted to cool down property prices as the property market was showing signs of a bubble. However, as it turned out the comments revolved around inflation and the fact that inflation went down to zero in June, rather far away from the target of 2%. I believe the UK should adjust its target going forward much like the U.S. In the case of the U.S., the inflation target was lowered from 2% to 1.6%.
Reasons given by Carney for the low inflation environment is because of low commodity prices and underutilized capacity.
As it turned out the GBP collapsed to a low of 1.5465, however, the real flows were at about 1.5488.
My trade was triggered but in the opposite direction from my hunch which was fine. It triggered the offer trade at 1.5570, and I squared the position at 1.5500 for a trading profit of 70bps on a trade size of 3Bn.
The GBP is now rising back to 1.5530 on slightly elevated unemployment claims out of the U.S.
This is a great lesson in not trying to second guess what the central banker is going to do, or for that fact, what the data is going to be, what’s more important is to ascertain whether the event is going to be a volatile one or not and if it is, then, my fx strategy will ALWAYS work!
What a TRADE! I am done for tonight!
The Panthenon Investment Group 