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Overnight Implied Doubles Background Vol, Leaving CPI in Spotlight

GBP
  • No let-up for GBP vols following this morning's wages and unemployment rate data - with overnights now capturing the Wednesday CPI release. Overnight implied has cleared 13 points, to double the YTD average background vol of 6.5 points - with today's appearance from BoE's Lombardelli in front of the TSC adding to the theme.
  • This blows out the break-even on an overnight GBP/USD straddle to ~65 pips, thereby capturing the cycle low and key support at 1.2409.
  • While wages topped expectations today, we note the key caveat being how much of this number can be explained by early wage rises relative to the National Living Wage rise that came into effect in April – captured by today’s data. Thereby, limiting the extent to which markets can reverse ’24 rate cut pricing.
  • This could make Wednesday’s inflation release more illustrative for monetary policy, and those looking for a corrective bounce eye a reversion back above the 200-dma at 1.2579 and fading GBP positioning, leaving markets far from stretched on the topside.
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