EUR/GBP set to remain volatile as uncertainty prevails – Danske Bank

Analysts at Danske Bank suggest that while GBP still is not out of the woods in terms of Brexit risks, they expect clarification on Brexit to reduce the risk premium priced in GBP in 2018 and erase part of the current undervaluation.

Key Quotes

“Timing political events is difficult and we prefer to position for a lower EUR/GBP via options, as we expect the path for EUR/GBP to remain volatile with upside risks still dominating in the coming 3-6M, not least given the UK government’s weak majority and the divergent views on Brexit within the Conservative Party.”

“Specifically, we recommend buying a 1Y 0.88302-0.8300 EUR/GBP put spread to position for a potential move towards the low end of the 0.80s. The strategy costs a premium of 168 GBP pips (1.9% of notional) and is profitable if EUR/GBP trades below 0.86622 at maturity. The initial long vega exposure fits well with our general risk assessment on FX volatility. Moreover, we note that the long put spread would benefit from a decline in implied volatility if accompanied by a significant decline in EUR/GBP spot, e.g. driven by a repricing of Brexit risk premium.”