Last week, Bank of England (BoE) maintained the bank rate unchanged at 0.50% and the stock of purchased assets at GBP375bn in April.
Cable was last at 1.4593, off earlier day highs of 1.4621. Sterling was also little changed against the euro, with EUR/GBP at 0.7750 off earlier highs of 0.7784.
Minutes from the monetary policy meeting noticeably indicated that BoE would stand pat ahead of the UK’s EU in/out referendum. In the event of Brexit, economic uncertainty should increase and the UK is likely to fall into a recession in H2 16.
This has forced the BoE to remain on hold in monetary policy, but in this scenario the BoE could have increased its APF programme by buying more assets in order to stimulate the economy, rather than cutting rates, that has also not happened. GBP asset purchase facility remained unchanged at 375B.
The preliminary release of the Q4 GDP figures was in line with forecasts at 0.4%, a decrease from previous flash at 0.6%.
It is likely that both GDP growth and employment growth will continue to slow in H1 16 as uncertainties attached to the EU referendum could hamper investment and private consumption.
UK CPI inflation surprised on the upside in March, increasing to 0.5% YoY from 0.3% YoY in February. However, UK economic data will generally attract less attention and is unlikely to cause a major market reaction in the coming months due to increased uncertainty ahead of the referendum.
The likelihood of the significant 'brexit' event keep adding pressures on the UK currency through the foreseeable future, while key events in the week ahead could force significant short-term volatility.
As the risk reversals for 1W-1M expiries also indicate that the puts have been relatively expensive and as stated above traders are willing to pay higher implied volatility prices as the strike price grows aggressively out of the money.
The current spot FX is trading at 1.4593, we anticipate more dips extending up to 1.35 levels in next 3 months or so. And it is understood that bearish momentum is bolstering as we saw that from delta risk reversal table, the highest negative flashes among G10 currency space.
So, bears have been willing to pay higher premiums, aggressive bears can initiate strategy using ATM puts.
The upcoming EU referendum represents a significant event risk to GBP, and poses a medium- to long-term risk. We target EUR/GBP at 0.80 in 1M, 0.76 in 3M, 0.74 in 6M and 0.75 in 12M.
Given the considerable binary risks related to the EU referendum we recommend GBP receivables via options. As an alternative to put options, contemplate a boosted risk reversal strategy.
Given the considerable drop in sterling owing to Brexit event, it is advisable to hedge around 50% GBP payables via FX forwards.
The material has been provided by InstaForex Company – www.instaforex.com