London’s financial industry from banks to hedge funds to insurers -- is pretty clear when it comes to the number one risk to financial stability: Brexit. U.K. political risk has jumped to the top of the chart in the Bank of England’s latest biannual survey, and almost every respondent who cited it explicitly referred to the European Union referendum.

Asked what issue is the hardest to manage, political risk also comes out on top, scoring more than twice as high as the second-ranked threat. The Sterling appreciated notably in the recent times. Anyone looking for a convincing reason behind this move would probably be dissatisfied.

We individually reckon that it is unconvincing and unsustainable as the reason behind it that is being cited was Prime Minister Theresa May’s assertion to British commerce that Great Britain would not leave the EU without a trade agreement or a transitional solution. In particular, as she made these comments hours before the move in the GBP exchange rates.

For now, more Brexit-related weakness and Fed hikes and estimates to attract shorts in GBPUSD during December and early 2017.

As stated in our recent post, we are sensing the copy-cat range process of the summer range we have been looking for in the medium term perspectives. This has actually become a range within that range, with 1.2300 – 1.2510 the inner range, while 1.2080 – 1.2675 is the current outer range. 1.28-1.31 is major resistance for us above there.  The cross is the main driver at this stage. Long term, we see a greater risk of another downside test and only that should complete the prevailing bear cycle.

Hence, at spot ref: 1.2634, we recommend buying GBPUSD 3m risk reversal vanilla strikes of 1.28 and deep ITM 1.30.

The position is naturally long vega on the downside and short on the topside, fitting with the volatility market dynamics. Cable skew normalized too much Five weeks after the Brexit vote, the GBP volatility market normalized sharply.

Alternatively, we buy 3m risk reversals again that favors bearish sentiments since the GBPUSD’s implied volatility is perceived to be rising among the major currency counterparts (but 1m ATM contracts shrinking below 10% in recent times, as a result, one can also think of writing expensive options.