FxWirePro: GBP FX OTC Hedging Bids Disregard Sterling’s Momentary Cushion on Geopolitical Trends

A disorderly Brexit has been averted! At least for 29th March. Yesterday, the EU guaranteed an extension until 12th April to Prime Minister Theresa May. Until then a decision has to be taken as to whether the UK takes part in the European elections. That means: if May manages to get her deal through Parliament after all in a third (or fourth or fifth) attempt the EU will give her until 22nd May to implement the necessary formalities. 

As a result, the UK would then no longer be a member of the EU at the start of the European elections on 23rd May. Instead, the transition period lasting until 31st December 2020 agreed in the Brexit deal would then start, during which and this is also relevant for the financial markets – the future relations would be agreed. If May does not manage to find enough supporters for her plan she would have until 12th April to decide whether Great Britain leaves the EU without a deal or whether to apply for an extension of EU membership with the aim of implementing a yet to be defined plan B, even if that meant having to participate in the European elections. 

It remains more expensive to hedge against strong GBP depreciation, which means that an orderly Brexit in whatever shape is still seen as being more likely. However, the risk of things going wrong is high and as a result, we regard any GBP appreciation with much skepticism. 

The sterling would have rebounded considerably within its recent ranges as it gets another breather before the next set of headlines hits but overall, sterling’s sentiments still appear to be fragile.

As a result, you could see fresh bearish bids for GBP risk reversals, that adds positive numbers to the existing EURGBP bullish hedging setup, below options strategy could be deployed amid such topsy-turvy fundamental outlook.

Options strategy: Keeping above seesaw geopolitical and hedging sentiments under consideration, 3-way straddles versus ITM calls are advocated to hedge EURGBP, the strategy comprises of at the money +0.51 delta call and at the money -0.49 delta put options of 1m tenors, simultaneously, short ITM puts of 1w tenors. The strategy could be executed at net debit but with a reduced trading cost.

Hence, on hedging as well as trading grounds, initiate above positions with a view of arresting potential FX risks on either side but slightly favoring short-term bearish risks. Courtesy: Sentrix, Saxo and Commerzbank

Currency Strength Index: FxWirePro's hourly GBP spot index turns -21 (which is mildly bearish), while hourly EUR spot index was at -62 (bearish) at 13:05 GMT. 

For more details on the index, please refer below weblink:

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