Fed maintains deferred plans:
The FOMC has engraved its rate projections largely again last meeting, again undermining the dollar versus every currency.
However, it hasn’t negated its tightening cycle, it has behaved for the past 18 months as if it plans to do so after very little work.
Even as the Fed comes back into play due to rising inflation, the dollar will face three potential game-changers: a revival in EM growth: Fed tightening that is too slow to lift real yield and a supply-driven turn in some commodity prices (oil). The first event is the least likely and the third an emerging reality.
Brexit series:
Elsewhere, David Cameron announced UK referendum is scheduled on 23rd June which is approximately 2 and half months from now.
You observe the these negative risk reversal numbers over the period between next 3M – 1Y tenors which is the highest among G10 currency space, you could understand as to why these hedging arrangements for bearish risks in GBPUSD.
GBP could be stabilising in spot but there's no mitigation of option-based measures of Brexit-torment (see risk reversal and IV nutshell).
Recommendations for bearish GBP – shifted strategy from GBP/CHF to EUR/GBP after the ECB meeting; added short GBP/SEK in spot to existing put spread, add shorts in GBP/AUD (spot) and cable (put spread).
We have made a few changes to the GBP Brexit basket over the past month.
We've added a short position in GBP/AUD to curtail the largely defensive spirit of currency space of sterling.
We quickly flipped back from GBP/CHF to EUR/GBP as the ECB divulged that it was moving away from a reliance on negative interest rates, followed by shorts in GBP/SEK in spot FX this week to increase the existing option-based exposure to the increasingly powerful downtrend in GBP/SEK.
The main support for GBP comes from the fact that Brexit has become a crowded trade amongst short-term investors – this was particularly evident in the broad-based position liquidation that ensued after the FOMC decision.
having said that, investors do not seem to be sufficiently hedged in longer-term against Brexit-risk.
Please be noted on how GBP risk-reversals stays inflexibly extensive, signalling no legitimate relief especially during Brexit torment in next 3 months.
The material has been provided by InstaForex Company – www.instaforex.com