FxWirePro: GBP Calls Alluring as Sterling’s FX Options Market Fairly Factors-in Geopolitical Developments

We had expressed surprise that GBP had not rallied even though the subjective probability of a disruptive no-deal Brexit had receded materially over the prior month. This anomaly was corrected with a vengeance in January as GBP rallied by a chunky of 4.5%. But having first undershot in response to favourable developments around the risk of no-deal, it appeared to us that GBP was in danger of over-reacting and was moving from merely removing the negative tail-risk of no-deal, which we estimate to be worth about 3% to GBP’s probability-weighted value, to beginning to price a materially higher probability of no-Brexit. This was premature, in our view, and the subsequent 1.5% correction lower in GBP tends to support such an assessment. 

Our forecasts have been moderately constructive on GBP for a while based on our central scenario that PM May will secure a negotiated, orderly Brexit. 

OTC FX Options: We see a minor shift in risk reversals of longer tenors but major bearish hedging sentiments remain intact in near terms, positive bids are observed in the GBPUSD risk reversals of 3m – 1y tenors. While positively skewed implied volatilities of 3m tenors also show hedging interests in bids for OTM puts that signal bearish risks. 

Take a look on attractive GBP calls: As you could see 1m GBPUSD ATM calls seem to be priced fairly at USD 1,888.83 which is trading just 6.6% more than NPV, whereas, IVs of these tenors are trending at 10.85%. Hence, contemplating the above fundamental factors, we think these ATM instruments are fairly priced-in. Courtesy: Sentrix & Saxo

Currency Strength Index: FxWirePro's hourly GBP spot index is inching towards 61 levels (which is bullish), and hourly USD spot index has bearish index is creeping at -134 (bearish) while articulating (at 10:17 GMT). 

For more details on the index, please refer below weblink: http://www.fxwirepro.com/currencyindex