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Macro and Vol Commentary 

EURGBP has drifted lower since the agreement of the Brexit deal, but can this momentum continue?

Economic Data

  • Lockdown restrictions in the UK have failed to present downside to sterling, due to optimism from the vaccine role out as of January 31st, 9.46m vaccines have been administered in the UK
  • This has improved risk appetite in the UK; however, weak data will filter through, but investors would do well to remember this data is historical
    • UK manufacturing PMI has declined in January to 54.1, from 57.3 in December 2020. Output growth and new orders were weaker in the month; this was due to weaker exports orders and disruptions to the supply chain due to COVID-19.
  • Employment in the UK manufacturing sector was positive, and a good indication of growing confidence in the UK
  • UK unit wage costs were up 3.3% y/y in Q3
    • Preliminary data for services and composite PMIs are expected to decline to 38.8 and 40.6, respectively
    • The employment change in the UK for November was -88,000 with the ILO 3 month unemployment rate at 5% up from 4.9% in the previous month
  • Average weekly earnings 3m/y was 3.6% in November
  • Total redundancies reached 395,000 in November, which is a record high. The furlough scheme continues to keep workers on company payrolls, suppressing redundancies compared to hours worked
    • Consumer confidence in the UK and Europe was unsurprisingly lower in January at -28 and -15.5 respectively, but confidence in the longer term is improving in the longer run. Retail sales in the UK were below expectations in December, with ex-auto fuel retail sales up 6.4% y/y in December, including auto fuel sales were up 0.3% y/y
  • Net consumer credit has declined to -1bn in December from -1.5bn the previous month
  • Consumer credit is down -7.5% y/y in December
  • Net lending was £5.6bn in December down from £5.7bn
  • Public sector net borrowing reached 33.4bn in December, and public finances reached 40.6bn
    • Business optimism declined in January to -22 from 0 in December, selling prices increased to 4 from 0, and total orders fell to -38 from -25
  • We expect costs for companies to increase due to Brexit and the rising sterling, causing cost-push inflation
    • CPI in December was 0.6% y/y, with core inflation at 1.4%y/y
  • The moderate rise in energy prices could also support inflation
  • Container freight rates have surged in recent months; this has led to containers being stranded in Europe, this will add to business and food costs
  • Global food prices reached a six-year high due to stockpiling and adverse weather. The rise in container rates could increase prices of packaged goods
  • Cost of moving freight between the EU and the UK remains elevated, with some firms avoiding the UK

Central Banks

  • We do not expect the BOE to move interest rates lower, but by not ruling negative rates out, this will keep effective rates lower and have a similar impact
  • Negative rates will suppress margins for the banks, and in turn, reducing their appetite to extend or grant loans to businesses
  • We expect the asset purchase programme to be unchanged in this week’s meeting at £895bn, any increases in asset purchases would be seen as an insurance policy
  • The UK economy shows pockets of growth, but we do not expect the economy to reach pre-pandemic levels until 2022. Growth forecasts for Q1 2021 will decline sharply due to the lockdown with estimates for Q1 GDP at -3.4%
  • The IMF forecasts for UK GDP to decline by 10% in 2020, but expect growth to reach 4.3% in 2021

Vaccine administration in Europe is behind the UK, as we know we have seen tensions over the vaccine escalate in recent days. However, these issues are resolved, but the UK is considerably ahead of other European countries, improving investor sentiment in sterling, despite Brexit and the lockdown. We expect poor data to be released for Q1 2021, but this data is again a lagging indicator. Stimulus measures from both central banks will remain incredibly accommodative in the near term, but we don’t expect the BOE to reduce rates on Thursday, more flirt with the idea. European economic and high-frequency data will be better than the UK’s, but all eyes will be on the vaccination rate, and we favour holding a short EURGBP position or selling into rallies towards 0.89.

Volatility Commentary

With the UK & EU having agreed on a trade deal after years of post-Brexit negotiations, we’ve seen GBP strengthen and GBP vols generally decrease from December when a deal was still uncertain. As seen in the graph, EURGBP is no exception, with realised and implied vols decreasing, and with vol generally realising below implied. As the vaccine’s for Covid roll out across the world, we expect EURGBP (as well as FX Macro vols) to decrease over the next few months, though we note the risk of potentially more potent Covid variants remain and may perturb this (though so far variants reported though more transmissible, are still effectively combatted by existing vaccines). So far, we also hold the view of EURGBP spot in the medium term will head lower with the UK’s vaccine rollout (and potentially for economic reopening) being much faster than European counterparts.

EURGBP 1-month Realised and Implied Volatility

EURGBP Trade Idea

  • Buy 10m EUR Notional EURGBP Put option, 0.8750 strikes, 3-month expiry for circa 90k EUR
  • Sell 5m EUR Notional EURGBP Call spread with strikes 0.8950 & 0.9150, 3-month expiry for circa 23k EUR to reduce upfront premium and long vol exposure (see point above about realised vs implied volatility)
  • Overall strategy cost circa 63k EUR

Positioning Charts

USDBRL NDO Positioning Data 19/01/2021 - 26/01/2021

There is a downside bias for USDBRL options market in the week to February 2nd, however, the larger nationals have an expiry later in February, and March. Call options executed in the near term could give USDBRL some upside momentum but the longer-term trend favours BRL strength. There is a reduced downside bias than the previous week but we the options market to prompt a BRL rally leading up to the large expiries in the week of February 23rd. 

USDBRL NDO Positioning Data 26/01/2021 - 02/02/2021

USDCNY Vanilla Positioning Data 19/01/2021 - 26/01/2021

Option volumes for USDCNY were stronger in the week to February 2nd, there is a cluster of options around spot. However, as we move further into February, there is a greater amount of put options due to expire below the market. With Chinese New Year this month, activity in their economy will falter and liquidity will be lower but the options market looks to be pricing in further weakness in the USD in February. When we compare chart 1 with chart 2 there is a narrower range in Chart 2 and the bubble sizes are on average are bigger suggesting larger notional values of options executed. We expect the USDCNY trend to remain intact even through Chinese New Year. 

USDCNY Vanilla Positioning Data 26/01/2021 - 02/02/2021

EURGBP Vanilla Positioning Data 11/12/2020 - 02/01/2021

Options executed in the week to February 2nd show fewer calls options with larger expiries above the market. However, as we focus on activity around the spot, there is a large cluster of calls at the market price which are due to expire in the coming weeks, this could drag the market higher in the near term. However, momentum in the spot market favours sterling but put volumes are lower than previous weeks and this could suggest a correction to the upside in the coming weeks. The options market range is narrower any correction may be less pronounced than previously thought. 

EURGBP Vanilla Positioning Data  02/01/2021 - 02/02/2021

Charts and Tables

FX Expiries


Volatility Grid

Historical Spot FX Volatility (30D Rolling)

FX Matrix (today)

Weekly Change

Key Events & Releases

Technical Charts

JP Morgan Global FX Volatility Index

The global FX volatility index has strengthened in recent sessions as it broke above the resistance at the 50-day moving average of 7.62. Near term, resistance stands at 100 DMA. The stochastics entered into the oversold territory as the RSI fall as well. The MACD diff is negative and diverging, suggesting further downward pressures. A break above 10 DMA showed an appetite for higher levels; however, the index remains capped by the current resistance level. A break above this level could set the scene for higher index to 7.80 to confirm the recent trend. On the downside, the index needs to break through the recent weeks’ lows to confirm the trend on the downside.

Dollar Index

The index was well bid and this triggered gains through 91.20. The stochastics edging higher once again but oscillate around the overbought territory, and the MACD diff is positive and converging, suggesting waning buying pressures. The reaffirmation of resistance at 91.40 could trigger a break below the 91.00, and a break below 90.50 would help to confirm the double top at 91.30. Conversely, a breach of resistance at the 91.40 may prompt the bulls could target the 91.50, the highs last seen at the beginning of December. The recent gains have been strong, but the indicators point to an end of the trend in the near term.


The market has sold off in recent weeks as selling pressure prompted a break of support at 0.89. The stochastics have given a buy signal, and the MACD diff is positive and diverging. To confirm the outlook of higher prices, and the rejection of the descending triangle prices need to take out the 50 DMA at 0.88410 and then the 0.89. This would also confirm the break of trend resistance. On the downside, if resistance at the 50 DMA stands firm, this could trigger losses back towards 0.88. A subsequent breach here would confirm the descending triangle, prompting a break to 0.87. Selling pressure in recent weeks has been strong, and we could see a continued bearish trend if prices break below the current support level.



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A large number of views are being generated at all times and these may change quickly. Any valuations or underlying assumptions made are solely based upon the author’s market knowledge and experience.

Please contact the author should you require a copy of any previous reports for comparative purposes. Furthermore, the information in this report has not been prepared in accordance with legal requirements designed to promote the independence of investment research. Data in this report has been sourced from Bloomberg unless otherwise stated. All information in this report is obtained from sources believed to be reliable and we make no representation as to its completeness or accuracy.

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