FxWirePro: FX Options Market Still Indicates Vulnerable Sterling Despite Boris Johnson Taking Office

The United Kingdom has got the new Prime Minister, Boris Johnson is taking office amid geopolitical turmoil. As the result was generally expected the reaction in the GBP exchange rates was quite modest. And actually, things are happening on the options markets anyway, which is due to the continued high uncertainty regarding the Brexit process.

The Commerzbank’s UK expert Peter Dixon foresees some possible scenarios for the date when the deadline expires on 31st October, the day when the UK is due to leave the EU. Simply due to the numerous possible scenarios the market is likely to struggle to price in one of them with a sufficiently high likelihood. That means that regardless of the scenario that emerges in the end, a significant share of the market is likely to react with surprise. That increases the likelihood of strong and abrupt moves in the GBP exchange rates.

Of course, certain tendencies are nonetheless discernible: the recent rise in premiums for a collapse in GBP for the 3-month horizon suggests that the market is increasingly expecting a disorderly Brexit at the end of October. However, what is interesting is that the premiums for the 6-12 month horizon remain on higher levels.

That means: the market sees a higher risk for significant Sterling depreciation beyond the Brexit deadline, which might suggest that it expects a further extension of article 50 and thus a no-deal Brexit at a later stage. In other words: even if we now have certainty about who will lead the new government in the UK, still nothing remains certain as regards Brexit.

Bullish neutral risk reversals of EURGBP have been observed to the broader bullish risk outlook in the FX OTC markets, this is interpreted as the hedgers are still keen on bullish risks but with mild downside risk sentiment in the near-term, while the pair displays 6.49-6.82% of IVs.

While positively skewed IVs of 3m EURGBP options have been balanced on either side, bids for both OTM calls and OTM puts. This is conducive for options holders of both OTM call and put options.

While EURGBP risk reversals of the existing bullish setup remain intact, even if you see any abrupt negative risk reversal numbers, it should not be perceived as the bearish scenario changer. Courtesy: Sentrix, Saxo & Commerzbank