Brexit Risk Becoming More Evident in GBP Options

Evidence of No Deal risk in GBP options has become more acute this morning following Barnier's cautious comments. GBP/USD's SMILE curve has skewed materially in favour of OTM puts over the past week, reflecting the lack of progress between the negotiating teams and the breakdown in risk reversals - GBP/USD 1m RR is now at its lowest since May. This pattern's repeated across the RR curve out to 1y tenors, reflecting the demand for downside protection in recent weeks.

Implied vols are largely steady across G10, with the exception of GBP & EUR vols which are both inching higher. GBP/USD 1m implied today cleared 10 points, hitting highest level since mid-November (although still well shy of the September/October average of circa 10.9 points).

Implied market probabilities for GBP/USD in 1m:

• Below 1.2750: 8.3%
  
• Below 1.3000: 16.1%
• Below 1.3250: 32.3%
• Above 1.3500: 38.3%
• Above 1.3750: 14.0%
• Above 1.4000: 3.2%