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The moment when EU chief negotiator Michel Barnier offered the British side an extension of the transition period (between leaving the EU and the final post-Brexit relations coming into force) by two years, the standpoints have been interpreted as a GBP positive signal spontaneously.
Well, two more years to clarify the future relationship and to negotiate something more constructive than the backstop solution, wouldn’t that be great? Until I realised that the extremists on the British side are likely willing to reject this offer. If only because the UK would then have to pay its EU contributions for another two years.
Primarily, the indication that the UK and the EU are closer to an agreement than perceived markets, which has come to light now that the budget is set to be passed. Our economists now think it increasingly likely that a deal will be finalized by the December 13-14 council meeting.
Secondarily, the news reports indicated a favorable outcome for UK in relation to financial services (British banks could get access to the EU after Brexit). Given these developments, we recommend tactical GBP longs vs EUR this week. The trade is recommended through options given that headline risk around getting the agreement passed in the Parliament will be high in the coming weeks.
At this juncture, the GBP exchange rates are holding their post-Thursday levels. However, that should not disguise the high (yes, even rising) nervousness on the markets. Proof is the renewed rise in EURGBP risk reversals, which price in an even bigger risk of collapse of Sterling than last Thursday (refer above chart).
The recommended structure is with capped downside given headline risk relating to getting the deal passed in UK parliament and is a (ratio) put spreads given already-rich GBP vols and given expectations of limited upside.
Trade tips: Buy 2m 1x1.5 EUR put/GBP call 0.87-0.8550 RKI 0.84 for 38.9bp (spot ref: 0.8890 levels).
Currency Strength Index: FxWirePro's hourly EUR spot index is flashing at -12 levels (which is mildly bearish), hourly GBP spot index was at -95 (bearish) while articulating at (13:02 GMT).
For more details on the index, please refer below weblink:http://www.fxwirepro.com/currencyindex
