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Options Wary Despite Spot Strength

GBP
  • Front-end implied volatility has inched higher for GBP Monday, with one-week vols narrowing in on 10 points, the highest since mid-May. The recent shifts in vol markets seems to have put an end to the trend higher in risk reversals across May (which mimicked the moderation in the VIX Index over the same period) and may suggest some political risk is beginning to be priced into options markets.
  • Current implied probabilities appear to be pricing in a greater chance of GBP/USD downside in the near future. Markets are pricing a 44% chance of GBP/USD trading below 1.2550 in one month’s time (up from 33% one week ago) and a 32% chance of trading below 1.2450 (up from 24% last Monday). This is reflected in a steepening of the GBP/USD SMILE curve in favour of OTM puts, suggesting markets remain on watch for downside in the pair as contracts begin to capture the June FOMC and BoE decisions.
  • GBPUSD has recovered further above last Wednesday’s low and bulls must now stage a test of key resistance at the 50-day EMA (1.2696) to strengthen short-term bullish conditions. The broader trend direction is down though and the trigger for a resumption of the downtrend is 1.2156, May 13 low.
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