Do you think GBPUSD is the worst behind us? Are Brexit negotiations better prospects?

Prime Minister May surprised the market by calling for a snap general election on 8 June.

The possibility of a hard Brexit has already been discounted by the market, but the larger parliamentary majority currently implied by the polls would strengthen the UK government’s negotiating position domestically.

The market is now assigning better odds to a post-Brexit EU-UK trade agreement, and thus the worst may be behind us and cable short covering may just be starting.

Potential trigger events:

Brexit talks, European council adopts Brexit guidelines on April 29th.

French elections are scheduled on Apr 29th, 2nd round on May 7th.

1Q GDP is lined on Apr 28th, PMIs on May 2nd & 4th, BoE monetary policy meeting on May 5th.

Bearish scenarios:

1) Growth slows below 1% as inflation checks a spend-thrift consumer and business investment fades pre-Brexit.

2) Outright capital repatriation from slower moving long-term investors including central banks.

3) Initial Brexit talks flounder on the size of the UK's exit-bill.

Bullish scenarios:

1) The government indicates a preference for a lengthy transitional deal with the EU which maintains the trade status quo for 2-3 years (i.e. time-limited EEA membership).

2) The economy rebounds to 2.0-2.5%.

3) The BoE adopts a hawkish bias at the May QIR.

The options positions set to shift and the FX OTC market is seeing a wave of unwinding of medium-term bearish puts as the 1y GBPUSD risk reversal has softened to its lowest level since end- 2015. You could make out this from the short covering curves, positive flashes of risk reversals in 3-9m tenors and bearish neutral numbers.

Risk reversals have led the spot positioning in the past, and the latter is still exhibiting extreme shorts.

Along with the shift in this hedging setting, shrinking implied volatilities in short tenors would imply that right times for exorbitant put option writers to snap the interim rallies to hedge the long-term bearish trend. A seller wants IV to fade away so the premium would also shrink away. You should also note short-dated options are less sensitive to IV, while long-dated is more sensitive.

Milder economic impact: The freshly released IMF WEO now forecasts UK growth of 2.0% this year, upgrading the January forecast by 0.5%. This reverses nearly all of the downgrade it penciled in after last summer’s Brexit vote (1.1% was forecasted in October).

Other news


See also: Current support and resistance levels
EUR/USD
GBP/USD
USD/JPY
GBP/JPY
EUR/CHF
AUD/USD
Apr 26 at 0:15 UTC
We invite you to start trading with
No Deposit Bonus