The last time the demand for the British pound was as strong as in the last weeks, we observed at the beginning of 2018. The British currency climbed by about 1000 pips in relation to the US dollar from 1.1900 to 1.2900 in less than two months.
Options investors have been expecting increased volatility in currency pairs with the British pound for a long time. This was due to the upcoming Brexit deadline, which according to Prime Minister Boris Johnson will occur - with or without agreement - at the end of October this year. The pound has recently gained in the hope that the agreement will be concluded and approved.
The first of these two elements have already been implemented. Boris Johnson and Jean-Claude Juncker, President of the European Commission, announced on Thursday, October 17, that they had reached an agreement, according to which there will be no hard border between Northern Ireland and Ireland. Northern Ireland will continue to be in the UK customs zone with the proviso that goods to be sold in the European Union will be taxed at EU rates. This was one of the more important topics that prevented the early conclusion of the agreement.
Despite the general optimism also observed on the British pound market, it should be remembered that already on Saturday, October 19, the British parliament must approve the agreement. And here the problem begins. Labor Party leader Jeremy Corbyn called for a second referendum, saying in Brussels that Boris Johnson's deal is worse than proposed by former Prime Minister Theresa May. First Scottish minister Nicola Sturgeon said her Scottish Nationalist Party would also vote against the agreement because it causes too far-reaching separation from the EU.
Investors on the currency options market estimate that after the weekend the volatility of the GBP/USD pair will reach 300 pips. This means that there may be a huge weekend gap in pairs with the British pound. Looking at the distribution of call and put options, investors began to protect themselves against the negative scenario and the decline in the pound. Buying exposure to the pound fall after Saturday's parliament vote costs much more than betting on increases on Monday. The risk of a deep GBP/USD correction is high, given the recent strong rise, as there is no guarantee that a sufficient number of MPs will support the EU Prime Minister Boris Johnson's pact.
However, if the agreement were approved, it seems that a very good period for the pound could start with a systematic potential upward trend, especially since there were voices from the Bank of England that a soft Brexit could result in considering interest rate increases.
Daniel Kostecki, Chief Analyst Conotoxia Ltd.
Materials, analysis and opinions contained, referenced or provided herein are intended solely for informational and educational purposes. Personal Opinion of the author does not represent and should not be constructed as a statement or an investment advice made by Conotoxia Ltd. All indiscriminate reliance on illustrative or informational materials may lead to losses. Past performance is not a reliable indicator of future results.
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