FxWirePro: Snapshot on UK PMIs - Deploy tactical GBP longs versus EUR via options

The UK’s manufacturing PMI moved away from October’s 27-month low of 51.1 to reach 53.1 in November. The outturn beat not only consensus expectations of a rise to 51.7, but also our more optimistic forecast of a 52.0 outturn. Looking at the detail, while output recovered last month – rising from 51.6 to 52.7 – the biggest improvement in manufacturing sentiment was due to a marked turnaround in the flow of new orders, with the component's balance recovering back up the 50-mark to 53.4 (from 49.2 previously). Still, it is worth noting that the new export order balance held below the 50-mark.

The two favourable developments as discussed indicate
that we are now moving into the next phase of
negotiations which would be somewhat GBP-positive
in the near term (we expect 2-4% of upside on the
crosses). This might appear as only modest upside but
additional upside will likely be capped by multiple
factors. 

First, even if an EU-UK deal is reached, the path
to securing Parliamentary support will likely be tenuous (multiple attempts will be likely be necessary which will
likely be a source of headline risk/ greater volatility). 

Second, our economists note that even though the
news on financial services is positive, the devil will be
in the details that will only be known subsequently. 

Finally, beyond the withdrawal agreement, the new trade
agreements still need to be reach which will be a multi-
year process leaving the Brexit-related uncertainty
overhang intact and thus limiting substantial GBP upside.

Hence, we recommend a tactical GBP long vs EUR through options. The recommended structure is with capped downside given headline risk relating to getting the deal passed in UK parliament and is a (ratio) put
spreads given already-rich GBP vols and given expectations of limited upside.

Trade tips (initiate long GBP vs EUR via options): Buy 2m 1x1.5 EUR put/GBP call 0.90-0.8550 RKI 0.85 (spot ref: 0.8910 levels). Courtesy: JPM

Currency Strength Index: FxWirePro's hourly GBP is at -76 (bearish), hourly EUR spot index is flashing at -50 levels (which is bearish), while articulating at (12:24 GMT). 

For more details on the index, please refer below weblink:

http://www.fxwirepro.com/currencyindex