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Month-End Flows, Option Expiries Aid Pound Sterling Bounce against the Euro and Dollar

Pound Sterling jumps into month end

Image © Adobe Images

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The British Pound was seen trading higher against the Euro, Dollar and other major currencies as it unwound some of its oversold conditions, aided by some significant options expiries and month-end rebalancing.

Month-end is typically a time of exaggerated moves in some currencies which have little by way of fundamental triggers or explanations as managers in the multi-trillion dollar fund industry look to rebalance their portfolios to account for currency moves.

To be sure, the performance of global equity markets in June was ultimately unremarkable and this left little obvious signposts to how flows would evolve on June 30.

But, Sterling appears to have started catching a more sustained bid as U.S. stock markets opened for the day suggesting equity flows / rebalancing had a part to play.

Furthermore, significant expiries in the options market might be providing some significant undercurrents in FX that have ultimately turned out to be GBP supportive.

"The market is now bouncing strongly as focus turns to flows around two large EUR/USD option expiries and month/quarter/half-year-end. The completion of month-end EUR/GBP demand and some trend-line extension resistance at the 0.9170s has seen the cross top out for the time being, which is mildly GBP supportive as well," says Erik Bregar, Head of FX Strategy at Exchange Bank of Canada.

(EUR/GBP at 0.9170 gives a GBP/EUR rate of 1.0905.)

Changes in GBP/USD and GBP/EUR

Above: Changes in GBP/USD (blue) and GBP/EUR (orange) on June 30.

"While there is now a stronger technical picture supporting the pair, traders are long and without the support of month-end demand there's cause to worry about a reverse," says Jeremy Boulton, a Reuters market analyst, of the EUR/GBP exchange rate.

The Pound-to-Dollar exchange rate is quoted at 1.2356 having been as low as 1.2257 earlier in the day, the Pound-to-Euro exchange rate is quoted at 1.109, having been as low as 1.0933 earlier in the day.

The key takeaway from month-end flows, and options market expiries, is that they are ultimately technical in nature and short-lived in duration.

While they could prompt some relief for Sterling in the near-term, the broader multi-day and multi-week fundamental outlook remains unsupportive.

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