FxWirePro: EUR/GBP interim bears appear in bullish hedging setup – 3-way straddle best suitable ahead of BoE

The focus today is squarely on the BoE which announces its policy decision and at the same time the minutes of the meeting along with a quarterly update of its Inflation Report with new economic forecasts. This will be followed by Governor Carney’s press conference. 

We expect a unanimous decision among the MPC members to keep rates at 0.75%, although there may be an outside chance of one member (Saunders) voting for an immediate hike.

EURGBP has been oscillating between a tight range of 0.8994 – 0.8282 levels, but the major trend remains puzzling even though bearish bias in the minor trend.

Well, let’s just quickly glance at OTC outlook before looking at the options strategies. 

Fresh negative bids in the shorter tenors of EURGBP have been observed to the broader bullish risk reversal outlook in the FX OTC markets, this is interpreted as the hedgers are still keen on bullish risks but with mild downside risk sentiment in the near-term, while the pair displays 5-6% of IVs.

While positively skewed IVs of EURGBP has also been stretched out on OTM Calls. This is conducive for options holders of OTM call options.

A key rate change since the last meeting on 21 March is that the risk of an imminent ‘no deal’ Brexit has been averted. Paradoxically, it is that uncertainty which may have led to increased stockpiling, providing a boost to economic activity in Q1. 

However, survey evidence suggests that underlying activity remains relatively subdued. If the Bank plumps for a Q1 GDP forecast of 0.4% but leaves its estimates for the remaining quarters of the year unchanged, this would push up the BoE’s annual GDP forecast for 2019 to around 1.4% from 1.2%. The Bank’s near-term CPI inflation forecast is likely to be revised up as a result of higher energy prices, while the over the medium-term it is projected to remain above target, with limited spare capacity pushing up domestic price pressures. That calls for UK interest rates to rise over the forecast horizon. However, the ‘fog of Brexit’ suggests policymakers will remain patient.

Sterling has been able to appreciate significantly as the Geopolitical surface considering the UK Parliamentary developments from the last week’s “meaningful” vote will continue to dominate the domestic focus. Until that emerges the risk of a no-deal Brexit remains in place, leaving the risk of Sterling setbacks high.

It remains more expensive to hedge against strong GBP depreciation, which means that an orderly Brexit in whatever shape is still seen as being more likely. However, the risk of things going wrong is high and as a result, we regard any GBP appreciation with much skepticism. 

You see any fresh positive bids in EURGBP risk reversals to the existing bullish setup, it should not be perceived as the bearish scenario changer. Instead, below options strategy could be deployed amid such topsy-turvy outlook.

3-way options straddle versus ITM calls seem to be the most suitable strategy for EURGBP contemplating some OTC sentiments and geopolitical aspects.

Options strategy: The strategy comprises of at the money +0.51 delta call and at the money -0.49 delta put options of 1m tenors, simultaneously, short (1%) ITM calls of 1w tenors. The strategy could be executed at net debit but with a reduced trading cost.

Hence, on hedging as well as trading grounds, initiate above positions with a view of arresting potential FX risks on either side but slightly favoring short-term bearish risks. Courtesy: Sentrix and Saxo

Currency Strength Index: FxWirePro's hourly EUR spot index is inching towards 109 levels (which is highly bullish), while hourly GBP spot index was at 159 (highly bullish) while articulating (at 08:12 GMT). 

For more details on the index, please refer below weblink: http://www.fxwirepro.com/currencyindex