FxWirePro: Sterling Continues To Gain Against Euro Ahead of ECB And BoE- Bid 3m EUR/GBP IV Skews And Deploy 3-Way Straddle

The Pound remains on the front foot, after a much stronger-than-expected confidence pickup in yesterday’s CBI survey. Attention will now turn to tomorrow’s PMI data which may prove pivotal in regards to January’s BoE rate decision.

Today’s ECB policy announcement is not expected to lead to any change in policy. Following the stimulus measures introduced late last year, the ECB is now on hold while it assesses developments. Indeed, there is a high probability that policy will be left unchanged all year. At her first post-policy meeting press conference in December, new ECB President Lagarde said that the downside risks to the economic outlook may now be less pronounced and that if further stimulus was warranted it may be better if it came from fiscal policy. The ECB will also today confirm that its comprehensive strategy review is underway. So far, the ECB has been reluctant to talk about what this will cover but indications are that the inflation target will be discussed as will any potential side effects of both negative interest rates and the asset purchase programme.

Hence, our defensive stance in EURGBP has been dictated by the receding global economic tide, but we cannot ignore that political risk has been an instrumental factor in these worse macro outturns. This warrants a tactical reduction in our defensive exposure but we uphold our hedging portfolios via 3-way straddles.

The passively skewed IVs of 3m tenors are well-balanced, indicating both upside and downside risks, more bids are observed for OTM call strikes up to 0.86 level and OTM put strikes upto 0.83 levels. 

While EURGBP risk reversals of the existing bullish setup remain intact despite fresh bids for bearish risks. Below options strategy could be deployed amid the expected turbulent conditions. According to the OTC FX surface, 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 3m tenors, simultaneously, short (1%) ITM call of 1m 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.

Alternatively, on hedging grounds we advocated initiating directional hedges that comprised of shorts in EURGBP futures contracts of February’2020 delivery and simultaneously, longs in futures of April’2020 delivery, shorts have expired now as per desired moves. We wish to maintain long positions. Courtesy: Sentry, Saxo & Llyods