FxWirePro: Mounting hedging activities for Sterling’s bullish risks as BoE nosedives to intensify rallies but UK inflation cushions

After holding important resistance in the 1.3260 regions, the GBP got sold vigorously post the BoE MPCs pessimistic outlook. But for today, trying out to hover at 7DMAs (i.e. 1.3158 levels).

No rate rise, only two votes against this decision and the economic outlook was lowered slightly. Compared with market expectations that were disappointing and Sterling came under notable pressure yesterday.

BoE’s Broadbent - likely rates will have to raise more than markets expect. Inflation fueled by GBP weakness. Inflation sits at 2% at the three-year horizon that forecast shows inflation of 2.2% throughout the second half of the three-year forecast period, conditioned on the current OIS curve which predicts two 25bp hikes. That explains simply why the MPC gives a signal that interest rates will have to rise by more than the OIS curve predicts to meet the inflation target.

Nevertheless, the MPC is becoming slightly less dovish, signaling that it plans to hike by more than the OIS curve prediction of two 25bp hikes in the next three years, an increase of 25bp compared to its May signal.

Not least comments from the central bank had caused rate hike speculation recently. The latter has now been postponed further into the second half of 2018. So what remains for Sterling is the prospect of an extremely tough Brexit process. The British side is clearly still lacking any clear strategy. Some in Brussels aren’t even excluding that the negotiations might fail.

Sterling is likely to suffer as a result of this news in the future as well. Early today EURGBP traded at 0.9040, so not far from the highs seen in 2016 in the immediate aftermath of the Brexit decision. From our point of view higher BoE interest rates seem unlikely at present, yet remain the only hope for Sterling.

Please be noted that the GBPUSD risk reversals are flashing positive numbers to indicate hedgers’ sentiments are shifting towards upside risks for next 1m timeframe.

GBP gamma seems to be a worthy buy for now as the vols are collapsed after BoE and seems to be cheap and attractive buy, especially in the likes of GBPCAD, GBPAUD and GBPNZD that all look cheap on our screens, purely because of the likely whipsaw in the pound going forward as the market turns its attention to assessing the full implications of the change in British political landscape once the French vote is out of the way.

Long 6m GBPUSD 1.28 put vs 1m 1.3460 call (25D risk reversal).