Mixed bag of economic flashes in Euro area, Inflation back in negative territory, GDP misses forecasts
Macro Outlook:
Euro zone GDP growth outperforms the US and UK in Q1 but reduced from its previous prints and misses forecasts, prints at 0.5% (Q1) versus 0.6%, supported by strong domestic demand
Growth is set to moderate in Q2, however, while annual headline inflation has returned to negative territory.
But, the current dynamics open the door to further EUR/GBP downside towards 0.7750 or below.
Expression - Sell downside volatility before the risk event (see IVs for 1W, 2W & 1M tenors).
The ECB is focusing on implementing existing stimulus measures for now, but more easing is possible later in the year.
Given the remaining uncertainty and the conditional nature of the event, a tactical bearish trade should be implemented via options.
Volatility is likely to gradually normalize approaching the vote, accompanied by GBP topside momentum and some deflation of the risk premium.
We favour the 6w expiry to benefit from the current unwind, thus avoiding direct exposure to the outcome and enjoying better liquidity on the volatility market.
Mechanics:
Buy EUR/GBP 1M put spread 1x2, strikes 0.77/0.75
Indicative offer: 0.58% (spot ref: 0.7750)
This put spread ratio positions meant for a moderate downside move and will benefit from further normalization in the volatility space.
The structure generates leverage between 4x and 5x if the spot trades close to the 0.75 strike at the 4w expiries.


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