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The British pound (GBP) has not performed well in 2018, so neither has the Guggenheim CurrencyShares British Pound (NYSEARCA:FXB) — when the GBP gets stronger, FXB moves higher, and when the GBP gets weaker, FXB moves lower. And the value of the currency compared to the U.S. dollar (USD) has been falling as the U.S. economy has been strengthen during the year, and investors have become increasingly concerned that the British economy is going to suffer if the British government can’t negotiate favorable “Brexit” terms with the European Union (EU).
We’re running up on the October deadline when leaders from the EU will gather at a summit to agree, or not agree, on a Brexit deal, and it appears British officials have been over-estimating how accommodating EU leaders are willing to be as Britain abandons the trade union. British officials were hoping they could still count on favorable trade arrangements after severing their agreement, but that is not a foregone conclusion — especially in this global environment that has been tainted by trade-war rhetoric.
If Britain can’t obtain favorable trade arrangements with the EU, the British economy is going to suffer, the Bank of England (BOE) may need to try and stimulate the economy and the value of the GBP is going to fall. When you compare this to the current strength of the U.S. economy and the USD, we think FXB is going to drop down to long-term support at $123, if not lower, during the next few months.
Here is how we recommend trading the situation:
Use a limit order to ‘buy to open’ the FXB October 19th $123 Put (FXB181019P00123000) for a maximum price of $1.00.
We are buying an October expiration to make sure we give this move plenty of time to happen in the run up to the October meeting in Brussels. You may see open interest that’s fairly thin for the October expiration. This is because the options have only been available for trading for a couple of weeks. We’re not too concerned with low open interest. The bid/ask spread is still tight, and if you use limit orders, you should have no trouble getting filled at a competitive price.
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