FxWirePro: Tackle Sterling’s Bullish Scepticism with Pinch of Salt - Maintain EUR/GBP positions via optionality

Sterling has been the underperformer among G10 FX space, thanks to the chaotic Brexit process to date. The Q1 outlook for the cross is binary: either a friendly Brexit or not. 

While the UK government has cancelled a parliamentary vote on the divorce settlement. 

We positioned for a modest albeit distinctly bounded relief rally in GBP through a ratio put spread as the UK was close to securing a negotiated and thus, somewhat reassuring exit from the EU. 

That verdict has been thrown into scepticism, 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 a 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 (EURGBP ratio put spread): Spot reference: 0.9012

Maintain long in 2m 1x1.5 EUR put/GBP call spread, 0.87- 0.8550 with an 0.84 RKI on the lower strike. Expiry January 13, 2019. Paid 39bp in November. Marked at 2bp. Courtesy: JPM

Currency Strength Index:FxWirePro's hourly EUR spot index is flashing at -31 (which is mildly bearish), while hourly GBP spot index was at 52 (bullish) at 13:30 GMT.

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