After a brief jump in GBPUSD above trend resistance at 1.3215, but could not sustain the highs of 1.3279 (pre-Yellen), we have seen a sharp reversal in Cable with the pair now consolidating back in the channel spanning 1.28 – 1.32. We expect range trading to persist ahead of more significant event risk later in the week.

While on a broader perspective, we reckon the pair is in the last phase of the bear trend that started back in 2007 at 2.1160.

Fed Chairperson Yellen hinted on Friday the scenario to raise interest rates is getting stronger given the firm performance of the US labour market and policy makers’ outlooks for growth and inflation. The probability of a hike in September rose from 24% (Monday last week), as high as 42% (last Friday), before retracing slightly to currently sit at 36%.

The dollar was hovering at fresh two-week highs against the other major currencies on Tuesday, as fresh hopes for an upcoming rate hike by the Federal Reserve continued to lend support to the greenback, USDJPY gained 0.38% to 102.31, but currently trimmed gains at the current 102.250 levels.

Hedge Perspectives: Trading a combo of 2m regular knock-in options

Buy USD/JPY 2m call strike 103.131 knock-in 99.5, (for the vanilla call, spot ref: 102.279).

Buy GBP/USD 2m put strike 1.2950 knock-in 1.3250 (for the vanilla put, spot ref: 1.3110)

The sum of the two exotic premiums (trading both scenarios conditionally – probability about 70%) is smaller than the cheapest vanilla (trading the GBP scenario unconditionally).

Risk Profiling:

No activation Investors buying knock-in options cannot lose more than the premium initially invested.

However, the USD/JPY call and the GBP/USD put will be activated only if their respective underlying FX rates hit 99.5 and 1.3250 before the 2m expiry.