FxWirePro: Preview of BoE monetary policy and deploy GBP/USD smart hedges

BoE is scheduled for its monetary policy on 2nd August; the MPC is expected to raise interest rates by 25 bps to 0.75% at its August policy meeting.

While the majority of the Committee are expected to support the move, some dissent also seems likely. Internal members Jon Cunliffe and Dave Ramsden remain the most likely candidates to vote against an increase.

UK GDP growth and inflation projections are likely to be little changed. However, risks remain skewed towards modest growth.

BoE’s guidance of the real rate of interest to focus attention on a 2.0 – 2.5% medium-term bank rate.

The joy that the Brexit negotiations on the British side are no longer being led by a Brexit extremist is justified. But the recent comments by EU negotiator Michel Barnier quickly dampened exaggerated euphoria in the currency market. He pointed to all the imaginary buildings in the British Brexit paper, such as the conceptually non-existent technical solutions for customs clearance that the British White Paper dreams of.

We reckon that the sterling should not suffer in the near-run. The interest rate hiking cycle by the Bank of England next week is now the consensus opinion in the market, but, one should not disregard the Fed on the other hand. Likewise, the primary disparity between BoE interest rate policy and ECB interest rate policy is strengthened and made clearer. The market has always ignored the fact that all the current BoE interest rate moves are due to a favourable result of the Brexit process.

Both the speculators and hedgers of GBPUSD are advised to capitalize on the prevailing price rallies for bearish risks and bidding theta shorts in short run (3m IVs) and 6m risks reversals to optimally utilize delta longs.

On hedging grounds, fresh delta longs for long-term hedging comprising of ATM instruments and OTM shorts in short-term would optimize the strategy.

So, the execution of hedging positions goes this way:

Short 3m (1%) OTM put option (position seems good even if the underlying spot goes either sideways or spikes mildly), simultaneously, initiate longs in 6m ATM -0.49 delta put options. A move towards the ATM territory increases the Vega, Gamma and Delta which boosts premium.

Thereby, the above positions address both upswings that are prevailing in the short run and bearish risks in long run by delta longs.

The political and economic backdrop remains supportive of sterling’s underperformance. We continue to be short but take partial profits by unwinding the GBPUSD expression of the trade since this is currently in the money but has only less than a week to expiry and is close to the strike. Courtesy: Commerzbank

Currency Strength Index: FxWirePro's hourly GBP spot index is inching towards 31 levels (which is bullish), while hourly USD spot index has bearish index is creeping at 2 while articulating (at 15:28 GMT). For more details on the index, please refer below weblink:

http://www.fxwirepro.com/currencyindex