FxWirePro: Stay short EURGBP though a ratio put spread ahead of BoE and Brexit

The Bank of England will leave its monetary policy unchanged today. What else could it do? Even though the rate of inflation eased slightly in November rising wages suggest that underlying inflation pressure is increasing.

However, whether this is also going to result in higher inflation levels depends mainly on the environment the British economy is going to be acting in over the coming months - i.e.: will Brexit happen on 29thMarch and if not, what happens next? These are the all decisive questions for Sterling, too. In view of the dominant Brexit uncertainty, monetary policy, which is aimed at the medium-term view, is paralysed and is not going to act as a driver for GBP exchange rates for now. 

After all, the BoE is trying to keep out of the political debate as much as possible. It is therefore likely to merely refer to the rising uncertainty and the negative consequences for the economy (and Sterling) this entails. 

In early November, we sensed that the UK was close to securing a negotiated and therefore somewhat reassuring exit from the EU. We positioned for a modest albeit distinctly bounded relief rally in GBP through a ratio put spread. 

That judgement has been thrown into doubt, at least over the timescale we had envisaged, by the political chaos that has unfolded in the UK since the government and the EU finalised the Withdrawal Agreement. The only sensible conclusion is that the feral nature of UK politics renders GBP untradeable in the short-term, and potentially uninvestable for an uncertain period after this should the Article 50 timetable for the UK exiting the EU slip beyond March 29, something that is entirely possible following the ECJ’s unexpected ruling that the UK has the unilateral right to revoke Article 50 at any stage (and also to resubmit it should it so wish). 

Our base case scenario is still that the Withdrawal Agreement will eventually pass the House of Commons after an initial rejection but the path to that is unclear and highly unstable, not least as EU leaders unsurprisingly confirmed at the EU Council meeting this week that it is not willing to materially, and may be not even cosmetically, alter the WA to assist PM May in this task. We hold the trade, but only because it is now effectively a free option, not because we have any realistic prospect of the political situation improving before January, if then.

Trade tips: Hold a 2m 1x1.5 EUR put/GBP call spread, 0.87- 0.8550 with an 0.84 RKI on the lower strike. Expiry January 3, 2019. Paid 39bp on November 2nd. Marked at 2bp. Courtesy: JPM

Currency Strength Index:FxWirePro's hourly GBP spot index is flashing at 41 levels (which is bullish), while hourly EUR spot index was at 72 (bullish) while articulating at (11:58 GMT). 

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