FxWirePro: Fair interpretation of EUR/GBP ATM IVs on mounting uncertainty of Brexit deal

The UK markets and particularly the GBP remain under pressure after PM May announced a delay to the ‘meaningful vote’. Uncertainty always weighs heavily on currencies and this is likely to overshadow today’s employment data. Nevertheless, the data is worth watching for indications of whether domestic inflationary pressures are building. We expect annual ‘regular’ pay growth in the three months to October to hold at a 10-year high of 3.2%. The unemployment rate is also expected to be unchanged at 4.1%, an indication that the labour market remains tight. While these trends may lead some BoE policymakers to suggest further increase in rates is advisable, such thoughts are likely to be over-shadowed by the ongoing Brexit uncertainty.

While geopolitical experts could still foresee the risk of a hard Brexit to be low (please refer to yesterday’s Economic Briefing by our UK expert). And we can only hope that they will be correct. The market is nonetheless likely to get increasingly nervous in view of the recent developments.

That is mainly reflected on the options markets where a further steep rise of the EURGBP implied volatilities can be seen (refer 1stchart). What is interesting is that an increased risk is mainly seen for the two to three-month horizon (refer 2ndchart) which is no doubt due to the Brexit deadline.  While the positively skewed IVs and risk reversals of this pair still signal upside risks further.

However, who can still say with any certainty that that still is the deadline? If the government sticks to its strategy of constantly postponing important decisions the uncertainty could last for longer than that (i.e. the bump in the volatility curve would move further out). One thing is clear: GBP investors continue to face a difficult time. Courtesy: commerzbank

Currency Strength Index: FxWirePro's hourly GBP spot index is inching towards -142 levels (which is bearish), while hourly EUR spot index was at 85 (bullish) while articulating (at 12:42 GMT).

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