GBP/USD - Vols at one-month high as EU politics dominate

GBP/USD implied volatility sits at one-month high of 9.0 as British PM Theresa May and her party struggle to end a stalemate over Brexit.

As per BBC reports, Theresa May is to travel to Brussels later in an attempt to break the impasse. May will be joined by Brexit Secretary David Davis for the meeting  with chief negotiator Michel Barnier and Commission chief Jean-Claude Juncker.

Investors fear that the plots to bring down May would thicken if the latest attempts to revive the talks fail. Thus, the volatility (uncertainty/fear gauge) is on the rise.

Still, the downside in the GBP was capped in Asia around 1.3270 on speculation hat the EU will indeed offer a two year transitory period.

Vols rise, risk reversals lag

• The one-month ATM option volatility currently hovers at a one-month high of 9.0
• Meanwhile, the one-month 25-delta risk reversal (currently at -0.68, recent low -0.85) has not shown much improvement despite the rally in the spot from 1.3027 to 1.33 levels. The weak pick up shows the sentiment is still bearish (Put options are expensive/more in demand).

GBP/USD Outlook

Kathy Lien from BK Asset Management writes, "Week is an important one for the U.K. because there are a number of key economic reports on the calendar that will play a major role in hardening or weakening the BoE's case for tightening.  Inflation, employment and consumer spending numbers are scheduled for release and we are mostly looking for stronger data that should take GBP/USD to 1.34."

GBP/USD Technical Levels

The spot was last seen trading around 1.3287. A break above 1.33 (psychological level) would open doors for 1.3338 (resistance on 4-hour chart), above which a major hurdle is seen at 1.3402 (monthly high). On the downside, breach of support at 1.3268 (July high) would expose support at 1.3198 (weekly 10-MA) and 1.3174 (support offered by the trend line sloping upwards from March low and June low).