FxWirePro: UK Q1 GDP and US inflation prints on focus – Diagonal debit put spreads to hedge GBP/USD on US-China trade tensions

The major data focus, for today, would be squarely on the ONS’s preliminary estimate of Q1 UK GDP at 08:30 GMT. Following relatively lackluster growth in Q4 of last year, strong outturns for monthly GDP for January and February mean that the pace of growth most likely picked up in Q1. We look for a quarterly rise of 0.5% in line with the BoE’s updated forecast. The details of the report are expected to show that spending by households provided the greatest contribution to growth over the quarter, with business investment likely to have remained subdued.

A large part of the expected acceleration in Q1 GDP growth is also likely to have reflected the activity of firms’ preparing for a potential ‘no-deal’ Brexit by stockpiling. However, with the UK having secured a six-month extension to Article 50 there is scope for some of these stockpiles to be unwound, which could drag on growth in the following quarters.

Meanwhile, in the US, with interest rate markets continuing to expect the Federal Reserve to ease policy this year and next, today’s CPI reading for April will be watched closely. However, the data is unlikely to support the case for lower interest rates as we expect annual ‘headline’ inflation to rise to 2.1% from 1.9% in March. This will be partly on the back of higher energy prices but also reflect a small move up in the ‘core’ rate.

OTC outlook:

Negative bids have been observed in the GBPUSD risk reversals of 6m tenors. While positively skewed implied volatilities of 3m tenors have still stretched towards OTM put strikes up to 1.25. To substantiate this downside risk sentiment, risk reversals have also been signaling bearish hedging sentiments.

We reckon that the sterling should not suffer like before, but, one should not disregard the Brexit settlement risks on the other hand. 

Both the speculators and hedgers of GBPUSD are advised to capitalize on the prevailing price rallies for bearish risks and bidding theta shorts in short run (1m IVs) and 3m risks reversals to optimally utilize delta longs.

Strategic Options Recommendations: On hedging grounds, fresh delta longs for long-term hedging comprising of ATM instruments and OTM shorts in short-term would optimize the strategy.

So, the execution of hedging positions goes this way: Short 1m (1%) OTM put option (position seems good even if the underlying spot goes either sideways or spikes mildly), simultaneously, initiate longs in 3m ATM -0.49 delta put options. A move towards the ATM territory increases the Vega, Gamma, and Delta which boosts premium.

Thereby, the above positions address both upswings that are prevailing in the short run and bearish risks in the long run by delta longs. Courtesy: Sentrix, Lloyds & Saxo

Currency Strength Index: FxWirePro's hourly GBP spot index is inching towards -50 levels (which is bearish), and hourly USD spot index has bearish index is creeping at 3 (neutral) while articulating (at 08:12 GMT). 

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