FxWirePro: Bearish/Bullish Scenarios, OTC Updates of GBP/USD and Hedging Strategies Ahead of Brexit Deadline

Bearish GBPUSD Scenarios: 

1) A no-deal Brexit (GBP down between 10% and 20%).

2) The Tories continues a material opinion poll bounce under Johnson, increasing the odds on an early election and the removal of parliament’s blocking majority on a no-deal. 

3) UK recession.

Bullish GBPUSD Scenarios:

1) Tories drop in the polls, Johnson loses a no-confidence vote and the subsequent general election (cable 1.30). 

2) Article 50 is eventually withdrawn.

GBPUSD has approached its 3-month downtrend line at 1.2022 level, and we look for this to hold the initial test but that appears to be momentary. Only a close above the downtrend this would introduce scope towards 1.2416 (which is 55-day ma). Otherwise, major downtrend still remains intact.

Let’s now quickly glance at OTC outlook and suitable strategy for GBPUSD swings.

OTC outlook: The positively skewed implied volatilities of 3m tenors have still stretched towards OTM put strikes that indicates the hedging sentiments for the downside risks. To substantiate the downside risk sentiment, risk reversals have also been signaling bearish hedging sentiments. Some positive shift is observed in the bearish risk reversal numbers in the shorter tenors. 

From the GBP OTC outlook, amid major downtrend we reckon that the sterling should not suffer like before, but, one should not disregard the Brexit settlement risks on the other hand. The market has always ignored the fact that all the current BoE interest rate moves are due to a favourable result of the Brexit process.

Stay short sterling via a limited loss tail hedge: Stay short a 2M GBPUSD 30d/10d bear put spread on August 2nd(spot reference: 1.22 level). Paid 0.66%. Marked at +0.74%. Courtesy: Sentrix, Saxo & JPM

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