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Briefing on technical analysis: The minor trend of cable (GBPUSD) formed rising channel and in the recent past it has broken out rising channel resistance but couldn’t sustain. As a result, failure swings have dragged the slumps below EMAs (refer weekly chart). The general setup of the British Pound remains fragile, which is best illustrated in Cable, where the double failure to beak or stabilize above 1.4342 (int. 50 %) in January and mid-April already led into a key-reversal week down as displayed last week. That said, we are now looking for a minimum setback towards 1.3450 areas.
Let’s glance at GBPUSD sensitivity tool, the positively skewed IVs of 3m tenors are signaling the hedging interests in the bearish risks, 3m bids are upto 1.32 levels. As a result, OTM puts strikes likely to expiring in-the-money.
While there no shift in risks reversals (refer 1m RRs – bearish neutral) that indicates the bearish risks remain intact in the underlying spot FX prices in near-terms which is in tandem with the technical analysis but bearish sentiments are mounting in medium-term basis (3m tenors).
The bearish risks in longer tenors also remain intact as the negative risk reversals of longer tenors indicate hedgers still bid for downside risks. ATM IVs are trending between 7.9% - 8.7% ranges for 1-2M tenors.
Hence, in order to arrest downside risk that is lingering in both short-term trend and major declining trend, we recommend restructuring previously advocated options straps into the diagonal option strips strategy that favors underlying spot’s downside bias in the short-run and mitigates bearish risks in the medium-term.
Hence, we advocate building the FX portfolio exposed to this pair with longs positions in 2 lots of 1M ATM 0.51 delta puts and 1 lot of ATM -0.49 delta calls of 3m expiries, these options positions construct smart hedging at net debit.
The strategy is likely to mitigate both bearish as well as bullish risks irrespective of spot moves. However, on speculative grounds, more potential is foreseen on the upside. Please note positive cashflows whether the underlying spot keeps flying or dipping.
Currency Strength Index: FxWirePro's hourly GBP spot index is inching towards -158 levels (which is highly bearish). Hourly USD spot index was at shy above 131 (bullish) while articulating (at 12:52 GMT).
For more details on the index, please refer below weblink:
http://www.fxwirepro.com/currencyindex
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