Friday, February 23, 2018
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GBP/USD – low odds of further near-term GBP gains?
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  • Risk reversals indicate falling demand for GBP calls.
  • Theresa May is now odds-on to resign in 2018, most options will hurt sterling.

GBP/USD options activity indicates a near-term top could be in place at 1.4345 (Jan. 25 high).

The implied volatility premium for GBP calls over GBP puts has quickly faded, as indicated by the risk reversals, suggesting investors are less concerned about a further near-term rally in GBP.

GBP/USD One-week 25 delta risk reversals are paid at 0.22 GBP puts today from a 0.17 GBP call bias two weeks ago. Meanwhile, the benchmark 1-month 25 delta risk reversals are 0.03 GBP calls from 0.375 GBP calls last week (also the long-term high).

PM May’s resignation could hurt Pound

Speculation is on the rise that “window is closing” on PM May’s leadership after recent complaints about her lack of vision and rows about the direction of Brexit. That said, May’s exit could be bad for the British Pound.

Reuters report says, “of the eight shortest priced names-in-the-frame quoted by bookmaker Paddy Power, at least four would raise the risk of a GBP-negative disorderly Brexit. Those four are Jacob Rees-Mogg, Boris Johnson, Andrea Leadsom and Michael Gove, all of whom backed the leave campaign.”

Meanwhile, the battered greenback could find bids if the Fed statement sounds hawkish and Friday’s wage growth numbers beat estimates. Given the overall situation, the probability of cable revisiting the recent highs above 1.43 is low.

GBP/USD Technical Levels

As of writing, the spot is trading at 1.4046 levels. A close below 1.4021 (10-day MA) would add credence to the argument put forward by risk reversals (that a top has been made) and open doors for a deeper pullback to 1.3902 (50% Fib R of 1.3458-1.4345). On the other hand, breach of immediate resistance at 1.4080 (1-hr resistance) could yield re-test of 1.4141 (1-hour 50-MA) and 1.4162 (1-hour 100-MA).

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