FXO Market Update - GBP lower

FXO Market Update - GBP lower

Summary:  Weak retail sales and PMI from UK have put pressure on GBP over the last days. Market is now pricing 146bps hikes for the rest of the year, down 25bps from last week. GBPUSD is down 350 pips since Friday and EURGBP is up 125 pips. Vol trades bid, 1 month GBPUSD is up from 7.0 to 9.25 and EURGBP 1 month up from 6.20 to 7.40.


Saxo Bank publishes two weekly FX Options Market Update reports covering changes and updates on the FX Options and FX Volatility market. They describe changes in FX volatility levels, risk premium and ideas how to trade based on these.

FX volatility, source Saxo Bank. Vol column: At-the-money volatility for the given maturity. 1w column: Change of the at-the-money volatility for the given maturity over the last week.
Source: Bloomberg, Blue: GBPUSD spot, Black: EURGBP spot

GBP has traded lower since the poor retail sales and PMI figurers last week. The weak reading from both indicates the economy is slowing and the pricing for BoE hikes is down with 25bps to now price 146bps hikes this year.

GBPUSD has taken out the 1.3000 support and broken down below the 1-year trend channel to now trade 1.2625. EURGBP is up 125 pips in the same time but is still trading within the trend channel. 

Vols are considerably higher with GBPUSD 1 month up from 7.0 on Friday to now trade 9.25 while EURGBP 1 month is up from 6.20 to 7.40. Risk reversals have also moved a lot for GBP puts with 1 month GBPUSD now trades 1.65 compared to 0.85 on Friday, EURGBP 1 month was trading 0.2 for EURGBP puts on Friday due to the French election and is now trading 0.75 for EURGBP calls.

We think GBP will continue to trade under pressure and see more potential in GBPUSD lower compared to EURGBP higher because of the more hawkish FED. We like to buy put spreads in GBPUSD to limit the premium and take advantage of the higher risk reversal and sell covered calls in EURGBP.

Buy 1 month 1.2600 GBPUSD put
Sell 1 month 1.2300 GBPUSD put
Cost 85 pips

Sell 1 month 0.8600 EURGBP call
Receive 25 pips

Spot ref.: 1.2625 & 0.8440
Source: Saxo Bank
  • The Top/Bottom charts shows the top 5 and bottom 5 values/changes for at-the-money vol, risk reversal (RR) and risk premium of the 45 currency pairs we are tracking.
  • Risk premium: Implied (Imp) minus realized volatility. A positive risk premium means implied volatility trades above realized volatility, i.e. the implied volatility can be seen as “rich”.
  • Change: The difference between current price/volatility and where it closed 1w ago.

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