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OPTIONS: Hedging Markets Still See Downside Risks for EUR/GBP

OPTIONS
  • EUR/GBP 3m vols capture not only possible policy moves at upcoming BoE and ECB meetings, but also the near-term risks present across both the French and UK parliaments. While vols have normalized considerably (back to ~4 points from mid-June's ~6 points) since Macron's snap election call, there remains a bias toward downside insurance via options, evident in both the popularity of EUR/GBP puts, and the 0.25ppts gap between 3m risk reversals and the rolling 12m average.
  • Since July 4th, over €3 in puts have traded for every €2 in calls in the cross, driven by demand for put strikes layered between 0.82-0.83 and as low as 0.80 (at which over €850mln notional has traded). This has shifted the options-implied distribution for spot over the coming 3 months, which currently prices EUR/GBP below 0.83 with a 13.8% likelihood (vs. 9.3% pre-Macron election call). Should this trend be sustained, analyst consensus should come under further pressure from it's current 0.85 (vs. Forward 0.8483).
  • The normalization of outright vol cheapens hedging for this outcome - a 3m 0.83 vanilla put costs ~28 EUR pips, cheapened to ~13 EUR pips when adding a 0.80 knock-out barrier.
  • Positioning offers further clues - CFTC data shows the GBP net position as a % of open interest rose to a new 52w high just ahead of the UK election, aiding the recent rally, while some sell-side analysts bolstered their UK growth outlook following the vote.
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  • EUR/GBP 3m vols capture not only possible policy moves at upcoming BoE and ECB meetings, but also the near-term risks present across both the French and UK parliaments. While vols have normalized considerably (back to ~4 points from mid-June's ~6 points) since Macron's snap election call, there remains a bias toward downside insurance via options, evident in both the popularity of EUR/GBP puts, and the 0.25ppts gap between 3m risk reversals and the rolling 12m average.
  • Since July 4th, over €3 in puts have traded for every €2 in calls in the cross, driven by demand for put strikes layered between 0.82-0.83 and as low as 0.80 (at which over €850mln notional has traded). This has shifted the options-implied distribution for spot over the coming 3 months, which currently prices EUR/GBP below 0.83 with a 13.8% likelihood (vs. 9.3% pre-Macron election call). Should this trend be sustained, analyst consensus should come under further pressure from it's current 0.85 (vs. Forward 0.8483).
  • The normalization of outright vol cheapens hedging for this outcome - a 3m 0.83 vanilla put costs ~28 EUR pips, cheapened to ~13 EUR pips when adding a 0.80 knock-out barrier.
  • Positioning offers further clues - CFTC data shows the GBP net position as a % of open interest rose to a new 52w high just ahead of the UK election, aiding the recent rally, while some sell-side analysts bolstered their UK growth outlook following the vote.