Pound Options Ignore Super Thursday to Brace for NFP: Analysis

Currency option traders seem to expect little of the Bank of England’s “Super Thursday” this week, even as they brace for potential market turbulence fueled by U.S. jobs data due the very next day, Bloomberg strategist Vassilis Karamanis writes.

Implied volatilities are lower...

The pound-dollar volatility term structure, which plots expected levels of fluctuations across option maturities, indicate much smaller swings around the BOE’s second Super Thursday, compared with the first one in August and the central bank’s September meeting.

That may be largely because U.K.’s headline inflation isn’t showing any significant pickup, which in turn points to low odds of BOE Governor Mark Carney flagging a sooner-than-expected interest-rate increase.

The U.K.’s EU-harmonized consumer price index fell 0.1 percent in September from a year earlier in the latest reading. MPC-dated Sonia forwards now price first full 25 basis points BOE rate rise in November 2016.

...Yet market braces for NFP impact

The sterling’s butterfly option volatility, a gauge of perceived likelihood of larger spot moves over given maturities, shows an increasing influence of Friday’s U.S. payrolls data on the pound-dollar spot price.

The one-week 10-delta butterfly graph shows the market is wary of wider price swings around the nonfarm payrolls data release, given the report’s implications for Fed liftoff prospects. The gauge reached a one-year high of 1.1450 on Oct. 30, rising from 0.6075 within a day, as the tenor captured the NFP release date.

That was the highest reading since September 2014, when the referendum on Scottish independence fueled option market turbulence. Option risk reversals, a pointer to market positioning and sentiment, are trading near recent range highs amid waning bearish sentiment on the pound versus the greenback.

Note: Vassilis Karamanis is a strategist who writes for Bloomberg. The observations he makes are his own.

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