FxWirePro: Overview of EUR/GBP technical and fundamentals – Options Trade Recommendations

It has been sensed that the UK was moving closer to securing a negotiated and therefore somewhat reassuring exit from the EU back in early November. That judgement has been thrown into scepticism, at least over the timescale we had envisaged, by the political chaos that has unfolded in the UK since the government and the EU finalised the Withdrawal Agreement. The only sensible conclusion is that the feral nature of UK politics renders GBP untradeable in the short-term, and potentially non-conducive environment for investment for an uncertain period after this should the Article 50 timetable for the UK exiting the EU slip beyond March 29, something that is entirely possible following the ECJ’s unexpected ruling that the UK has the unilateral right to revoke Article 50 at any stage (and also to resubmit it should it so wish). 

The base case scenario is still that the Withdrawal Agreement will eventually pass the House of Commons after an initial rejection but the path to that is unclear and highly unstable, not least as EU leaders unsurprisingly confirmed at the EU Council meeting this week that it is not willing to materially, and may be not even cosmetically, alter the WA to assist PM May in this task. We hold the trade, but only because it is now effectively a free option, not because we have any realistic prospect of the political situation improving before January, if then.

Technically, the end of month flow saw the EURGBP spike down to re-test range supports in the 0.8950/30 region. While over that region the risks remain for a test above 0.9100. However, for now we seem content to remain within a range. Above 0.9100, next resistance lies around 0.9160, the last main technical barrier ahead of 0.9305 (which traded back in August 2017). Below 0.8930, 0.8845/20 is pivot support within the medium-term range. Key support in that process is at 0.8700-0.8620.

On a broader perspective, the re-test of the 2008 highs at 0.9802 level is not disregarded. Nevertheless, the risk of that has decreased as the medium-term range plays out. A decline through 0.8250 key support would negate upside risks and suggest a move back to 0.8000 and 0.7500.

Trade tips: Contemplating above factors, we positioned for a modest albeit distinctly bounded relief rally in GBP through a ratio put spread. Maintain a 2m 1x1.5 EUR put/GBP call spread, 0.87- 0.8550 with an 0.84 RKI on the lower strike. Expiry January 15, 2019. Paid 39bp in November. Marked at 2bp.

Currency Strength Index: FxWirePro's hourly EUR spot index has flashed at -31 (which is bearish), while hourly GBP spot index has shown 52 (bullish), while articulating at 12:06 GMT. 

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