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MNI: ### POV: RISK OF STERLING COMPLACENCY RISING, EVIDENT IN OPTIONS MARKETS...
-2018 has already seen acute bouts of volatility for USD, CNH, CAD and JPY, but
it's been a particularly quiet start to the year for GBP.
-This is reflected in options pricing, with both 1m and 3m GBPUSD option
volatility recently falling to levels not seen since late 2014. Concurrently,
GBPUSD 3m risk reversals are now sitting just under longer-term highs and EURGBP
3m risk reversals continue to recover in the GBP's favour.
-This pricing suggests markets see little risk in protracted GBP downside in the
near future and are therefore reluctant to hedge/insure against it.
-Earlier this week BNY Mellon wrote that markets have been wrong-footed by BoE
hawkishness and risks on the inflation and Brexit front will outweigh any
positive economic news, meaning GBP is unlikely to break much higher this year.
-CFTC positioning data shows GBP net longs close to 3yr highs, meaning any GBP
downside could be exacerbated by extended long liquidation as markets are caught
-As such, Brexit and negative data surprises should be watched with caution.