Monday, February 19, 2018
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GBP/USD – Off 3-week low, but not out of the woods yet
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  • Pound recovers from the three-week low of 1.3836.
  • But, demand for GBP put strengthens.
  • GBP ranks last on the list of safe havens, courtesy of Brexit uncertainty.

The demand for GBP puts (bearish bets) continues to rise despite Pound’s recovery from the three-week low.

The one-month 25 delta risk reversals are being paid at GBP 0.887 puts – the highest since Nov. 17. (Indicating strong demand for bearish bets on GBP). Just two weeks ago the risk reversals were being paid at GBP 0.175 calls (bullish bets). Meanwhile, the risk reversals were paid at 0.85 GBP puts yesterday.

The turnaround in the risk reversals indicates the options market has turned bearish on the GBP. More importantly, yesterday’s recovery in GBP/USD from 1.3836 (three-week low) failed to weaken demand for GBP puts (as indicated by the drop in risk reversals from 0.85 to 0.887).

Pound ranks last on the list of safe havens

Also, as the Reuters report says, “Cable strength may be a thing of the past if the recent rise in market volatility is here to stay. As a current-account-deficit country facing uncertainty over Brexit and domestic politics, sterling ranks low on the list of safe havens.”

Stocks may have regained poise yesterday, but are still not out of the woods as bond yields continue rising and uptick in inflation is no longer a good news for investors.  Cable could take a beating if the equities turn risk-averse again.

Further, Brexit uncertainty could continue to weigh over Pound. As per Reuters report, the EU wants is seeking power to restrict Britain’s access to the single market during a transition period and this could prove a major sticking point for pro-Brexit UK government faction.

GBP/USD Technical Levels

The bearish 5-day MA and 10-day MA cross indicate a bearish setup. A failure to hold above the Asian session low of 1.3942 would open doors for 1.3836 (previous day’s low) and 1.38 (psychological level). On the other hand, a move above 1.4007 (38.2% Fib R of Jan. 11 low – Jan. 25 high) could yield test of 1.4048 (5-day MA) and 1.4095 (10-day MA).

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