Pound to decline as banks show interest to exit London

Short covering coupled with better than anticipated second-quarter preliminary business investment index reading triggered a rally in the Pound against the Polish Zloty during the month of August. In Poland, the 0.9% y-o-y decline in the consumer prices in July also aided the Zloty’s fall. The GBP/PLN pair hit a high of 5.1451 in August. However, we believe that the GBP/PLN pair will undergo a short-term correction due to the reasons mentioned below.

On Tuesday, the Bank of England announced that the total loan offered to consumers have increased by £3.8 billion in July.

The total loan value, however, fell short of the six-month average of £5.1 billion and the analysts lending estimate of £4.9 billion. Similarly, the quantum of loan approvals for house purchases declined to 60,912 in July, from 64,000 in the prior month. On an average, the number of housing loan approvals over the past six months was 68,775.

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In the meantime, the Central Statistical Office of Poland (GUS) reported that the Polish economy expanded by 0.9% in the quarter ended July 2016. On a y-o-y basis, the country recorded GDP growth of 3.1%. Following the UK’s decision to exit the EU, Poland is trying to position itself as the next financial hub of the world. Poland's Deputy Prime Minister Mateusz Morawiecki, who is scheduled to travel to London this week, is expected to meet the head of various financial institutions.

The Deputy Prime Minister is confident of wooing the head of institutions, which offer risk management and IT services related to the financial sector, to shift their middle-office and back-office operations to Poland. Morawiecki also confirmed that talks have indeed begun with major financial institutions in this regard. Undoubtedly, such a scenario would favour the decline of the GBP/PLN pair.

The historic chart indicates the existence of resistance at 5.1450 levels. Minor support (S1) exists at 5.06, while the major support (S2) exists at 4.97. The stochastic indicator in the sub-chart reflects an extremely overbought scenario. Thus, we can anticipate the GBP/PLN pair to decline at least to the immediate support level S1.

So, a Forex trader should go short in the GBP/PLN pair at 5.1400 levels with stop loss above 5.1800. The short position can be closed near 5.07. The risk to reward ratio for the trade is about 1:2.

A binary trader can purchase a one touch put option to profit from the forecasted decline of the GBP/PLN currency pair. The target price for the put option deal can be 5.07 or higher. Likewise, the trader must ensure that the expiry date of the contract falls in the last week of September.

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