FxWirePro: Sterling OTC market gets fresh bids but less resilient ahead of UK’s parliamentary vote on Brexit deal

UK Parliament will vote to decide on passage of the deal triggering article 50 with European Union;

In this write-up, we run you though the latest twist in this whole political chaos is speculation as to whether Prime Minister Theresa May might postpone the vote in the House of Commons that is planned for Tuesday. As it seems pretty clear that the proposed deal negotiated between the British government and Brussels is going to be rejected in a spectacular manner that seems to be the best option for May. It is difficult to tell whether there is any truth to these rumors. May’s spokesmen are currently denying them. 

However, the decisive issue is: the 11thof December is becoming less relevant. GBP optimists will probably see the postponement of the vote as the best chance of a constructive decision (possibly even no Brexit at all?) and the GBP pessimists can see it as more time wasted, increasing the likelihood of time running out and thus of a no deal Brexit.

As both interpretations make sense they are balancing the spot market and GBP spot levels are reacting hardy at all. Only volatility is increasing. Refer 2ndchart. On the issue of Brexit please also refer to Peter Dixon’s article “Decision draws nearer – or perhaps not”in today’s edition of the Week in Focus. 

It remains more expensive to hedge against strong GBP depreciation, which means that an orderly Brexit in whatever shape is still seen as being more likely. However, the risk of things going wrong is high and as a result, we regard any GBP appreciation with much scepticism. At least until Tuesday, but probably well beyond then.

Although you are seeing risk reversals show fresh positive bids, the positively skewed GBPUSD implied volatilities of 3m tenors still signal bearish hedging sentiments. To substantiate this downside risk sentiment, risk reversals have also been in negative territory despite some minor positive bids in the short-run. We see less volatile swings in GBPUSD, if you plot weekly technical chart. 

We reiterate 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 abrupt price rallies for bearish risks and bidding theta shorts in short run (1m IVs) and 3m risks reversals to optimally utilize delta longs. Courtesy: Tradingview, sentrix, saxo and commerzbank

Currency Strength Index: FxWirePro's hourly GBP spot index is inching towards 85 levels (which is bullish), and hourly USD spot index has bearish index is creeping at 31 (bullish) while articulating (at 13:23 GMT). 

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