FxWirePro: Sterling gains momentary momentum on UK manufacturing PMIs, bears still linger ahead of constructive and service PMIs – Deploy short hedge

We’ve recently noted that the UK Manufacturing PMI rose to 54.4 in May 2018 from the previous month's 17-month low of 53.9, and well above market expectations of 53.5. Output growth accelerated mainly due to the steepest build-up of finished goods inventories in the 26-year survey history and a sharp reduction in backlogs of work.

On the other hand, incoming new business rose the least in almost a year and the pace of job creation eased to a 15-month low. On the price front, input cost inflation picked up for the first time since January while the rate of selling price inflation eased to its weakest since last August. UK manufacturers maintained a broadly positive outlook for the sector in May.

For now, sterling has gained its traction against major currency peers, such as, GBPUSD spiked from the lows of 1.3204 to 1.3357 levels, GBPJPY gained from 143.195 to the current 146.245 levels, and EURGBP dipped from the peaks of 0.8809 to 0.8732 levels.

While traders focus on the construction and service PMIs data announcements that are scheduled today and tomorrow respectively, these are the level of a diffusion indices based on surveyed purchasing managers in the construction and service industries that indicate the economic health, businesses reactions swiftly to the market conditions, and their purchasing managers hold perhaps the most current and relevant insight into the company's view of the economy.

Bearish GBPJPY scenarios:

1) BoE rate hikes are delayed until much later in 2018 as core CPI continues to moderate and wages remain sticky below 3%;

2) The UK and EU fail to agree on the Irish border, leading to a non-negotiated Brexit;

3) The overt balance of payments pressure

4) The global investors’ risk aversion heightens significantly,

5) If Prime Minister Abe steps down

As we anticipate further minor rallies amid the major declining trend of GBPJPY, below FX derivatives strategies are advocated on hedging grounds:

1) Dubious and risks averse traders, we advocate buying GBPJPY – USDJPY 1Y ATM straddle spread with equal JPY vega.

2) Alternatively, on hedging grounds, we advocate shorting futures contracts of near-month tenors as the underlying spot FX likely to target southwards 145 levels in the near run.

Writers in a futures contract are expected to maintain margins in order to open and maintain a short futures position.

Currency Strength Index: FxWirePro's hourly GBP spot index is flashing -10 (which is neutral), while hourly JPY spot index was at -85 (bearish), while articulating (at 08:32 GMT). For more details on the index, please refer below weblink:

http://www.fxwirepro.com/currencyindex.

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