Brexit fears has been darkening the GBP prospects, but the main support for GBP comes from the fact that Brexit has become a crowded trade amongst short-term investors – this was particularly evident in the broad-based position liquidation that ensued after the FOMC decision.

Carney had highlighted in the past about the overall benefits of the UK’s EU membership while mediating in the Brexit debate.

Moving on, big tail risk of this potential event is evidencing its effects on sterling.  We estimate the risk of Brexit at 45% and the accumulated negative shock to the economy at 4-8% over five years.

We remain bears of GBP/USD, as the BoE MPC is deferring, the ’Sword of Brexit’ is hanging over confidence, and EUR/GBP valuations go hard-pressed. We look ahead to see cable to drop below 1.40 by Q3 2016 and we see EUR/GBP struggling to break below 0.70, even as EUR/USD falls.

Stay short in GBP/USD through diagonal put spread, hold 2m GBP/USD (+1% ITM strikes & -1.5% OTM strikes with shorter expiry) debit put spread.

Stay hedged in EUR/GBP upside risks via straps with cautiously balanced weights, with risk reversal being neutral in short run (at zero) dipping IVs forecasted, go long on 1M at the money 0.52 delta call, 2M out of the money (2% strike i.e. our below cap) 0.35 delta calls and simultaneously go long on 1M at the money -0.48 delta put with net debit.

That being said, longer-term investors do not appear to be adequately hedged against Brexit-risk. It is quite striking how GBP risk-reversals remain stubbornly wide, suggesting no real relaxation in Brexit torment.

Stay short in 1M GBP/SEK ATM  -0.49 delta put option at 11.69.  

Go long in EUR/GBP (3M /1M) diagonal debit call spreads at spot ref: 0.7890 (0.7850-0.8050).  

Stay short in 2W GBP/CHF ATM -0.51 delta put at spot ref: 1.3815.  

Go long in 3:1 GBP/AUD at 1.9170 (1M/1M/2M/2W) diagonal put ratio back spreads at spot ref: 1.8876 (1.8876/1.8492/1.8866).

Hold 3M risk reversal & put backspreads, and alternatively, a 6M 1.40-1.33 GBP/USD put spread,

EUR/USD ─ Sell EUR/USD 3M ATM vs Buy EUR/USD 6M ATM -1.5 vol.