Summary: Weak retail sales and PMI from UK have put pressure on GBP over the last days. Market is now pricing 146bps hikes for the rest of the year, down 25bps from last week. GBPUSD is down 350 pips since Friday and EURGBP is up 125 pips. Vol trades bid, 1 month GBPUSD is up from 7.0 to 9.25 and EURGBP 1 month up from 6.20 to 7.40.
Saxo Bank publishes two weekly FX Options Market Update reports covering changes and updates on the FX Options and FX Volatility market. They describe changes in FX volatility levels, risk premium and ideas how to trade based on these.
GBP has traded lower since the poor retail sales and PMI figurers last week. The weak reading from both indicates the economy is slowing and the pricing for BoE hikes is down with 25bps to now price 146bps hikes this year.
GBPUSD has taken out the 1.3000 support and broken down below the 1-year trend channel to now trade 1.2625. EURGBP is up 125 pips in the same time but is still trading within the trend channel.
Vols are considerably higher with GBPUSD 1 month up from 7.0 on Friday to now trade 9.25 while EURGBP 1 month is up from 6.20 to 7.40. Risk reversals have also moved a lot for GBP puts with 1 month GBPUSD now trades 1.65 compared to 0.85 on Friday, EURGBP 1 month was trading 0.2 for EURGBP puts on Friday due to the French election and is now trading 0.75 for EURGBP calls.
We think GBP will continue to trade under pressure and see more potential in GBPUSD lower compared to EURGBP higher because of the more hawkish FED. We like to buy put spreads in GBPUSD to limit the premium and take advantage of the higher risk reversal and sell covered calls in EURGBP.
Buy 1 month 1.2600 GBPUSD put
Sell 1 month 1.2300 GBPUSD put
Cost 85 pips
Sell 1 month 0.8600 EURGBP call
Receive 25 pips
You should be aware that in purchasing Foreign Exchange Options, your potential loss will be the amount of the premium paid for the option, plus any fees or transaction charges that are applicable, should the option not achieve its strike price on the expiry date
If you write an option, the risk involved is considerably higher than buying an option. You may be liable for margin to maintain your position and a loss may be sustained well in excess of the premium received.
By writing an option, you accept a legal obligation to purchase or sell the underlying asset if the option is exercised against you; however far the market price has moved away from the strike. If you already own the underlying asset that you have contracted to sell, your risk will be limited.
If you do not own the underlying asset the risk can be unlimited. Only experienced persons should contemplate writing uncovered options, then only after securing full detail of the applicable conditions and potential risk exposure.
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