GBP/USD: Options market turns bearish on Pound, indicates waning Brexit optimism
|- GBP/USD's options market is currently reporting the strongest bearish bias since April.
- UK's parliament on Saturday rejected Prime Minister Johnson's Brexit deal.
GBP/USD's options market is most bearish on Pound since April, a sign the investors are adding bets to position for a drop in Sterling on waning Brexit optimism.
One-month risk reversals (GBP1MRR), a gauge of calls to puts on the British Pound crashed to -1.70 on Friday and is currently seen at -1.65. Friday's print was the lowest level in six months. Notably, the gauge had jumped to a 21-month high of 0.125 on Oct. 11.
The negative number indicates the premium claimed by (or the demand for) put options (bearish bets) is higher than the premium for call options (bullish bets).
The slide from Oct. 11's high of 0.125 to Oct. 17's low of -1.70 indicates the investors were expecting the UK parliament to put brakes on Prime Minister Boris Johnson's Brexit deal and hedged against potential sell-off in Pound by buying put options.
More importantly, the options market maintained its bearish bias on Pound in the Asian session.
Waning Brexit optimism
Super Saturday turned out to be a dud with the UK parliament withholding support for the Brexit deal, forcing Prime Minister Johnson to send a letter to the EU requesting a three-month extension to article 50.
Johnson will try again on Monday to secure parliament’s support for his Brexit deal in a yes/no meaningful vote, according to The Guardian. However, markets fear the Speaker could rule it out of order or MPs may again withhold support for it until full legislation is passed.
The GBP, therefore, may come under pressure, as anticipated by the options market. As of writing, GBP/USD is trading at 1.2914, representing a 0.46% loss on the day, having hit a high of 1.2990 on Oct. 17.
While the options market is preparing for Brexit delay, the analysts at Goldman Sachs lowered the probability of a no-deal Brexit to 5% from 10%.
GBP1MRR
Technical levels
Information on these pages contains forward-looking statements that involve risks and uncertainties. Markets and instruments profiled on this page are for informational purposes only and should not in any way come across as a recommendation to buy or sell in these assets. You should do your own thorough research before making any investment decisions. FXStreet does not in any way guarantee that this information is free from mistakes, errors, or material misstatements. It also does not guarantee that this information is of a timely nature. Investing in Open Markets involves a great deal of risk, including the loss of all or a portion of your investment, as well as emotional distress. All risks, losses and costs associated with investing, including total loss of principal, are your responsibility. The views and opinions expressed in this article are those of the authors and do not necessarily reflect the official policy or position of FXStreet nor its advertisers.