FxWirePro: Scenario analysis of British currency – Bid 3m bearish neutral risk reversals and skews to hedge GBP/USD

GBPUSD bearish scenarios: 

1) A no-deal Brexit (GBP -10%). 

2) Fed surprisingly hints for extension of hiking cycle

3) PM May resigns and/or is replaced by a harder-Brexiteer following the defeat of a Brexit motion in parliament, opening way to #1.

GBPUSD bullish scenarios: 

1) A negotiated Brexit which includes a political declaration supporting a soft-Brexit 

(Norway-model).

2) BoE abruptly adds stimulus, prepones a hiking decision, though the market does not expect the Bank Rate to be hiked until late next year, in August this year, the Bank Rate was lifted to 0.75%.

3) Defeat of a Brexit motion in parliament causes the government to fall, paving wave for a general election and/or a second referendum and potentially no Brexit.

For all those who may not have hedged their GBP risks yet, the current situation provides a reasonably attractive entry level. 

OTC outlook:

Positive bids are observed in the GBPUSD risk reversals of short-term tenors. While positively skewed implied volatilities of 3m tenors still signal bearish hedging sentiments. To substantiate this downside risk sentiment, risk reversals have also been bearish.

We reckon that the sterling should not suffer like before, but, one should not disregard Fed’s hiking cycle on the other hand. 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 (1m IVs) and 3m risks reversals to optimally utilize delta longs.

Strategic Options Recommendations: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 1m (1%) OTM put option (position seems good even if the underlying spot goes either sideways or spikes mildly), simultaneously, initiate longs in 3m 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 short run and bearish risks in long run by delta longs. Courtesy: sentrix, saxobank

Currency Strength Index: FxWirePro's hourly GBP spot index is inching towards -118 levels (which is bearish), and hourly USD spot index has bearish index is creeping at -93 (bearish) while articulating (at 11:24 GMT). 

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