GBP: Options Augur Against GBP, Highlighting S/T Downside Risks
Sep-03 09:03
- The growing negative correlation between longer-end yields and GBP is extending this morning. The recent drop in spot and renewed fiscal concerns are supporting a bid in vols: 3m implied has been marked higher to 8 points this morning, erasing the summer lull and returning above the YTD average of 7.8 points (which is already well above 2024's 6.9 points).
- In tandem, the front end of the GBP risk reversals curve has deteriorated: dropping to lowest since March against USD and lowest since July against EUR - signalling decent demand for GBP downside insurance covering the rest of 2025 - despite the continued pricing-out of further rate cuts into year-end 2025.
- GBP options activity was ahead of average yesterday, and that trend's persisted into Wednesday: decent demand for downside exposure is the driver here. So far today, close to $4 in puts have traded for every $1 in calls, with 1.31 and 1.29 put strikes garnering the most notable interest. Some of the more sizeable trades across these strikes are consistent with put spreads targeting an October/November expiry - so rolling off just prior to the UK Budget on November 26th with a break-even below ~1.3025 at expiry.
- As a result, the GBPUSD vol surface is leaning further in favour of OTM puts, tipping the GBPUSD SMILE to its sharpest skew since the April Liberation Day vol episode. This raises the risk of GBP/USD downside in the coming months, isolating 1.3144/42 as key support - the 38.2% retracement for the YTD upleg, as well as the August 1st low.
- Scrutiny over UK press will now increase: policy proposals are usually floated in the media ahead of the Budget - allowing ministers to phase-in any fiscal bad news and retain rabbit-in-the-hat style positive policy surprises on Budget Day itself.
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