Yesterday saw the BoE deliver comprehensive easing including, a 25bp cut in Base Rate, £60bn in additional gilt purchases, £10bn of corporate bond purchases and introduce a new “Term Funding Scheme”. The total package exceeded market expectations, and as a result put GBP under further pressure post-Brexit events.

Universally known fact that the U.K.’s decision to leave the European Union may eventually hamper the investor confidence and weigh on trading, adding to challenges facing the exchange operators.

Technical glimpse:

Long term, the decline through the 2009 lows at 1.35 is viewed as the last phase in the bear trend that started back in 2007 from the 2.1160 highs. We favour a multi-month bottoming process. What isn’t clear yet is whether the current rebound from the 1.2800 region is the start of this process. A decline through there sees next major support in the 1.22-1.18 region.  

OTC outlook and hedging frameworks:

As a result of above fundamental as well as technical reasoning we could foresee the further FX risks of sterling against the dollar. We reckon that it could be optimally mitigated by the below option derivatives frameworks.

Buy GBP/USD 3m risk reversal strikes 1.28/1.3550 (please observe mounting hedging sentiments in bearish trend of the pair)

Indicative offer: zero cost (spot ref: 1.3140), on a technical perspective, 1.35 should remain a strong horizontal resistance as the 2009 lows and the level rejected when the cable tried to bounce in mid-July.

We expect the pair to remain capped below this level.

The high strike is set at 1.3550 and the put strike at 1.28 such that the package is zero cost.

The position is naturally long vega on the downside and short on the topside, fitting with the volatility market dynamics (see Graph).

Risks > 1.3550: The investors face unlimited risk if the cable moves above 1.3550 at the 3m expiry. They would have to hedge the trade’s delta in such a scenario.