FxWirePro: Sterling Still Edgy Amid Pandemic Saga - Driving Forces, OTC Outlook & Hedging Strategies of GBP/USD

GBP’s performance ranks mid-table over the past month (+0.5% vs USD, -2.5% vs EUR) as the global impact of the coronavirus has come to dominate GBP's local difficulties with Brexit. But even though Brexit is now being overshadowed by an even more existential crisis, this doesn’t let GBP off the hook, far from it actually, as the accelerated removal of GBP's interest rate support as the BoE prepares to respond to the COVID-19 shock will further undermine the sustainability of the UK's worst-in-class current account deficit (a 4-5% of GDP current account gap is incompatible with the UK's new reality as a low-growth, low-yielder).

In addition, while Brexit is being overshadowed, this is only temporary and GBP remains vulnerable from a great sense of realism amongst investors about the government's objectives for the EU trade talks and its credible threat still to walk away in the pursuit of regulatory autonomy from the EU and freedom from strict level playing field commitments.

As a result of the Brexit-virus one-two we are lowering the GBP forecast. The point of maximum jeopardy is expected to be around mid-year as the trade talks reach their make-or-break point (remember that the government has legally barred the transition period from being extended beyond end-2020) and the risk of no- deal crescendos. 

Options Strategy (Debit Put Spread): Contemplating above factors, wise to deploy diagonal options strategy by adding short sterling: Stay short a 1M/2W GBPUSD put spread (1.25/1.14), spot reference: 1.2340 level. 

The Rationale: Observe the 3m GBP’s positive skewness that has stretched towards OTM Put strikes, hedgers have shown interests for bearish risks. 

To substantiate the downside risk sentiment, risk reversal numbers have still been signalling bearish hedging sentiments in the long run. Hence, we advocate the diagonal options strategy on both hedging and trading grounds.

Alternatively, activate shorts in GBPUSD futures contracts of April’20 deliveries with an objective of arresting potential slumps. Courtesy: Sentry, JPM & Saxo

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