FxWirePro: Sterling hedgers foresee upside traction amid BoE and unsettled Brexit apprehensions

The Bank of England will announce its policy decision at midday and, at the same time, release the minutes of the meeting and quarterly update of its Inflation Report with new economic forecasts. Governor Carney will hold a press conference at 12:30BST. 

We expect a unanimous decision among the nine MPC members to keep interest rates on hold at 0.75%, although there may be an outside chance of an MPC member (Saunders) voting in favor of an immediate hike.

The Bank’s near-term CPI inflation forecast is likely to be revised up as a result of higher energy prices, but we expect the medium-term projection to be broadly unchanged from February as Brexit risk has only been postponed and not to be completely disregarded, even though there is allegedly a rapprochement between the positions of Prime Minister Theresa May and that of opposition leader Jeremy Corbyn. As a result, the BoE is unlikely to do anything much to the key rate this year.

The inflation is projected to remain above target in the medium term, with limited spare capacity pushing up domestic price pressures. That calls for UK interest rates to rise over the forecast horizon. However, as the ‘fog of Brexit’ has not completely lifted, we anticipate policymakers will remain firmly in the wait-and-see mode this year.

UK local elections will take place across much of England and Northern Ireland today. Outside the UK, the final reading for Eurozone manufacturing, including the first release for Italy and Spain, will be released. Eurozone Q1 GDP growth firmed, but the jury is out on how long lasting it will be, with survey evidence pointing to softer momentum.

Let’s just quickly glance at GBP crosses OTC outlook before looking at the options strategies. 

Fresh negative bids for EURGBP and positive shift for GBPUSD, in the shorter tenors, have been observed to the broader bearish risk reversal outlook in the GBP FX OTC markets, this is interpreted as the hedgers are still keen on bullish risks but with mild downside risk sentiment in the near-term.

While positively skewed IV of EURGBP has also been stretched out on OTM Calls. This is conducive for options holders of OTM call options.

It cannot be totally ruled out that one member of the monetary policy committee (MPC) might maintain the hope of a rate hike before year-end and that this will change the MPC’s voting pattern, but until Brexit is over this is likely to remain a minority view on the MPC. The market would probably nonetheless be likely to interpret this as slightly more restrictive and therefore positive for Sterling so that a brief GBP rally would be likely to follow in that case. Courtesy: Sentry, Lloyds, & Saxobank

Currency Strength Index: FxWirePro's hourly EUR spot index is inching towards 109 levels (which is highly bullish), while hourly GBP spot index was at 159 (highly bullish) while articulating (at 08:38 GMT). 

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