FxWirePro: British trade deficit to expand and add stress on GBP; deploy BPS on hedging front

The sharp narrowing in the April trade deficit also indicates a positive contribution from net trade to UK GDP growth in Q2. However, given the volatility of the external trade data, this narrowing is unlikely to have been sustained in May and some deterioration in the trade balance is expected. Forecasts for trade balance numbers to expand at -9.7 billion which is quite more than previous flashes at -8.6 billion.

Technical glance:

On weekly chart of this pair shows doji pattern on market peak which means an earlier trend reversal is boiling on.

But before jumping into the guns please note that this is for short term basis as the previous intermediate trend has been uptrend.

Engulfing bear like candle is traced out on daily charts at around 189.258 levels which is a signal of weakness.

On weekly data, this is confirmed by oscillators with downward convergence to the price line.

RSI (14) at 56.8193, converging with falling prices.

Stochastic: %D line 80.0063; %K line 66.9667 crossover above 80 levels signaling a clear overbought scene.

Currency Option basket: Bear Put Spread (GBP/JPY)

Bear Put Spread shall be used over Protective Put as the premiums on naked puts prove too costlier.

Bear Put Spread = ATM Protective Put (188.573) + Sell another Put with lower Strike Price (Out of the Money = 187.575) for GBP 100,000

It comes with a partial hedging option which only minimizes the loss if the underlying currency has to move lower but does not cap the loss.

Bear Put Spread reduces the cost of hedge by the premium collected on the Out of the money Put but it comes at the expense of Partial hedge rather than a complete hedge.