Pound Options Show Pessimism With Bearish Bets at 7-Week High

  • Three-month options near proposed start time of Brexit process
  • Brexit transitional phase to ease leaving EU likely says May

Schmieding: Pound at Risk From Brexit Negotiations

Pound traders are becoming increasingly bearish on the currency, with the cost of insurance against a decline versus the dollar at the highest since November.

Sterling slid against all of its Group-of-10 peers on Wednesday, and three-month risk-reversals, which expire close to the March deadline by which Prime Minister Theresa May intends to start the formal Brexit process, suggest concern more losses may be imminent. The U.K. currency, which rallied in November, fell to the lowest level in a month against the dollar on Tuesday, and is now down more than 17 percent since the nation voted to quit the European Union in June.

  • The pound drops 0.2 percent to $1.2341 as of 10:08 a.m. in London. 
  • Currency has declined 2.5 percent, and risk-reversals have also dropped, since the U.S. Federal Reserve increased interest rates and signaled a faster path of rate hikes in 2017 at a meeting on Dec. 14
  • Sterling weakens 0.3 percent to 84.26 pence per euro
  • Three-month risk-reversal at 140 basis points in favor of puts over calls.
  • U.K. 10-year gilt yields little changed at 1.39 percent
  • Brexit Transitional Phase on Agenda for EU Talks, May Says: Link
  • Pound technicals:
    • GBP/USD: Close below ichimoku cloud and 55-DMA keeps bears in charge into year-end. Resistance at 1.2409-16, Dec. 20 high, 55-DMA and then at 1.2445, Dec. 19 mid open/close price. Support at 1.2313, Dec. 20 low, followed by 1.2302, Nov. 18 low. Options expire at 1.2500 (GBP943m)
    • EUR/GBP: Consolidates above 200-DMA support. Resistance at 0.8440-50, 21-DMA, Dec. 19 high and support at 0.8375, Dec. 20 low

— With assistance by Vassilis Karamanis, and Sejul Gokal

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