How to Trade the British Pound's Rally

AP

Buckingham Palace

The British pound has been exhibiting sterling performance. Here's one strategist's plan for its next move.

Between M&A activity, demand for Britain's triple-A bonds, and rising stock prices, the British pound has faced nothing but sunny skies lately.

"M&A right now is big because companies have a ton of cash on their balance sheets," says Rebecca Patterson, chief markets strategist for J.P. Morgan Asset Management, Institutional. And that alone creates a tactical currency-trading opportunity, she says. "If you see a deal going across the wire and you hear that it's cash, you want to be buying the currency of the target company."

Be careful, though: Brian Kelly of Shelter Harbor Capital says that at nearly 1.60 against the dollar, "this is a problem for the U.K. economy." And that, he says, will sap the pound's strength.

Kelly wants to sell the pound against the dollar, entering the trade at about 1.5991 with a stop at 1.6100 and a target of 1.5600.

Amelia Bourdeau, director of foreign exchange at Westpac Institutional Bank, likes the trade. Two members of Britain's Monetary Policy Committee are in favor of easier monetary policy, she says, and "I don't like any currency where two people on the monetary policy committee want to ease."

You can watch the discussion on the video.

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Learn more: The essential vocabulary for currency trading is on Key Currency Terms. Top currency strategies are broken down for you in Currency Class.

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