Currency Volatility Talking Points
- Sterling Expected to be Most Volatile Currency
- BoE to Remain Cautious Given Weak Data and Rising No-Deal Brexit Risks
Top 10 most volatile currency pairs and how to trade them
GBP/USD Expected to be the Most Volatile Currency
GBP/USD | With the Federal Reserve out of the way, focus will turn towards the BoE Quarterly Inflation Report. Consequently, implied volatility in the Pound is higher than its major counterparts with overnight vols at 11.898 (highest since April), which in turn shows a break-even straddle of 61pips(this means that option traders would need to see more than a 61pip move higher or lower before gains are realised). Risk reversals show increasing demand for GBP puts over calls at -0.350, which is the lowest since May 27th. As it stands, the BoE’s current forward guidance continues to highlight that gradual and limited over the forecast horizon, however, markets simply do not believe this statement as overnight index swaps price in a near 60% chance that rates be cut by the year-end and a 100% chance that rates will be cut by May 2020.
Bank of England Rate Expectations
Elsewhere, UK data has continued to disappoint with risks of a potential contraction in growth for Q2. At the same time, no-deal Brexit risks have also been on the rise since Boris Johnson became Prime Minister, as his cabinet ministers signal that the government are working on the assumption that there will be no new agreement with the EU, which in turn raises questions as to whether the BoE would alter their Brexit assumption. That said, risks remain tilted to the downside for the UK economy, although with the Pound dropping to a 31-month low, the weaker currency may start to underpin inflation in the months to come.
— Written by Justin McQueen, Market Analyst
To contact Justin, email him at [email protected]
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