Although the sterling came under notable pressure yesterday ahead of the hearing of Bank of England governor Mark Carney in front of the House of Lords’ committee. However, Carney did not provide any news, i.e. he did not suggest in any way that monetary policy would be eased further, and so Sterling managed to recover a little already during the hearing. This increases fears of a “hard” Brexit because so far nobody sees a possibility of achieving this without May having to accept notable restrictions when it comes to accessing the single market.

The fact that only such a weak cause was required to cause such a pronounced Sterling move constitutes a warning signal. This time round luck may have been on Sterling’s side as the fundamental weakness turned out to be unjustified and Sterling was able to retrace some of its losses as a result.

But what will happen when the British government activates article 50 of the TEU and Brexit finally becomes concrete?

There is a high likelihood that at the start of the negotiations both sides, i.e. the British government and the EU 27, would pursue a tough stance so as to achieve the best possible deal for themselves.

Nonetheless, the movement in the Sterling exchange rates was notable. After all the sterling eased by just about 1% against the euro within the space of just a few seconds. Against USD it depreciated even more.

The execution: Buy GBP/USD 4m call spread strikes 1.23/1.26, global KI 1.18, indicative offer: 0.45% (vs 1.17% without barrier, at spot ref: 1.2240).

The 4m expiry comes a little before the likely invocation of Article 50, expected in March 2017. The market is likely to discount the political agenda ahead of its implementation. 

The maximum leverage of 6.5 times is reached beyond 1.26 and the strategy is profitable above 1.2350 at expiry, if 1.18 has been touched at any time. 

Rationale: Cable should settle at a new equilibrium. The discounted gloomy UK outlook both prevents a new bold depreciation and a much stronger currency.

The technical picture suggests a new turbulent range between 1.21 and 1.28, with a real risk to see short-lived spikes in liquidity air pockets below 1.20.

Near-term, a moderate cable appreciation is likely as the market cleans extreme GBP shorts and adjusts the overshoot below interest rates. This increases fears of a “hard” Brexit because so far nobody sees a possibility of achieving this without May having to accept notable restrictions when it comes to accessing the single market.

Risk profiling: No activation as the investors trading a call spread with a global knock-in cannot lose more than the premium paid.

However, the cable must hit 1.18 at any time to activate the structure and return at least above 1.2350 at the 4m expiry to generate a profit.