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Bearish GBP scenarios:
1) Rate hikes are delayed until much later in 2018 as core CPI continues to moderate and wages remain sticky below 3%;
2) The UK and EU fail to agree on the Irish border, leading to a non-negotiated Brexit);
3) Overt balance of payments pressure
The genesis of GBP’s slide in April (GBP is the worst performing G10 currency since the dollar began to rally in mid-April) was a fairly prosaic economic one, namely the belated recognition by the BoE and investors that the economy had barely grown in 1Q and that monetary policy needed to become more data-dependent as a result.
Unfortunately for GBP, just as lead indicators in the UK are starting to improve and holding out hope that growth is set to re-accelerate above potential in 2Q that could bring rate hikes back into play (the rate market prices the probability of an August hike at 50%and a full hike by Feb 2019), the politics of Brexit is starting to intrude.
We suspect this could impede any real recovery in GBP in the coming few months. The uncertain interplay between economics and politics entails a still confused and possibly volatile outlook for GBP, albeit on balance we retain a modestly negative tilt for the GBP forecasts due to the lack of visibility on the contours and end-point for Brexit with only ten months until the UK is due to leave the EU.
Hence, we advocate building GBPUSD portfolio exposed with longs positions in 2 lots of 2M ATM 0.51 delta puts and 1 lot of ATM -0.49 delta calls of 2m expiries, these options positions construct smart hedging at net debit.
The strategy is likely to mitigate both bearish as well as bullish risks irrespective of spot moves. However, on both hedging and speculative grounds as more potential is foreseen on the downside.
Elsewhere, one can initiate shorts in GBPJPY futures contracts of mid-month tenors with a view to arresting potential downside risks as the underlying pair is on the verge of extending price dips which is 3w lows. Courtesy: JPM
Currency Strength Index: FxWirePro's hourly GBP spot index is flashing -34 (which is bearish), while hourly USD flashing at 90 (bullish), while hourly JPY spot index was at 79 (bullish) while articulating (at 08:20 GMT). For more details on the index, please refer below weblink:
http://www.fxwirepro.com/currencyindex
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