The research team at Societe Generale explains that the options market is seeing a wave of unwinding of medium-term bearish puts after the UK PM May announce a snap general elections in June as the 1y GBP/USD risk reversal has softened to its lowest level since end-2015.
“Prime minister May surprised the market by calling for a snap general election on June. The possibility of a hard Brexit has already been discounted by the market, but the larger parliamentary majority currently implied by the polls chart below would strengthen the governments negotiating position domestically. The market is now assigning better odds to a post-Brexit E- trade agreement, and thus the worst may be behind us and cable short covering may just be starting.”
“Positions set to shift
The options market is seeing a wave of unwinding of medium-term bearish puts as the 1y GBP/USD risk reversal has softened to its lowest level since end-2015. Risk reversals have led the spot positioning in the past, and the latter is still exhibiting extreme shorts.”
“Milder economic impact
The freshly released IMF WEO now forecasts growth of 2.0 this year, upgrading the January forecast by 0.5. This reverses nearly all of the downgrade it pencilled in after last summer’s Brexit vote 1.1 was forecasted in October.”