FxWirePro: Sterling’s depreciation on check as UK steps back from the Brexit cliff-edge, shrink in vols, evenly skewed IVs and bearish-neutral RR to substantiate

Do you think the Brexit dust has settled? Is Cable slump poised?

The unexpected announcement a few weeks back of an early general election for June 8 managed to wrong-foot pretty much all of the political pundits who had expected PM May to soldier on with her narrow parliamentary majority (mainly because that is what the PM had insisted she would do).

The announcement has been favorably received by GBP whose trade-weighted index has subsequently appreciated by a net 1.7%. As things currently stand, GBP has now retraced approximately one-third of the peak-trough decline following last year’s referendum vote.

The net depreciation attributable to Brexit is now 16%, which puts it on a par with the ERM crisis in 1992 and is only half as severe as the banking crisis of 2008-2009.

While the positive reaction of the last few weeks is understandable insofar as the early election is liable to deliver a substantively enhanced majority for the Conservative government (from 12 seats to perhaps 100) and in all likelihood opens a smoother path to Brexit, we do not believe it paves the way for a sustained recovery in GBP.

After Brexit apprehensions, GBPUSD recoupled with short-term rates, which are unlikely to trend in H1’17. The Brexit formalities would not be soft but seem unlikely to bring in large surprises or any dramatic movements in GBP over the next six months. Settling dust and the cable’s future range make GBP volatility a Sell.

Cable neither up nor down: The forecasts suggest the cable in the upcoming months to remain in its new range above 1.23, but not rise as high as 1.3033 or maximum upto 1.33. The UK outlook is definitely too gloomy to turn bullish Sterling and believe in a firm continuation of the ongoing short covering.

Please be noted that IV skews have been evenly distributed towards both OTM put as well as OTM call strikes for 1-3m tenors, while bearish-neutral risk reversals indicate the same, hedgers’ bet for underlying spot to remain in its new range above 1.23, but not rise as high as 1.3033 or maximum upto 1.33 while vols are shrinking away.

For more reading on GBPUSD major downtrend, please visit below weblink:

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