Good morning

WOW WOW WOW. There is a fire in GBP’s belly.

I wrote in my blog yesterday how I predicted EUR/USD and GBP/USD would fall from 1.3650/1.7150  to 1.3600/1.7100  respectively. That happened alright, but then GBP/USD left the EUR/USD behind and rallied back all the way to 1.7150 leaving EUR/GBP the ultimate winner FINALLY (as I predicted) breaking the psychological 0.7950 level. Currently trading at 0.7925 this represents another crucial level for EUR/GBP and a close under this level opens up 0.7850-75 as the next big trigger point. This is a monumental move, make no mistake.

What is interesting to note at this point is how the FX vol (options) market has reacted, or in this case NOT!! 1m EUR/USD LOWER at the open quoted 4.05/4.35 and the 1y 5.85/6.05 (curve steepening), GBP/USD 1m 4.30/4.50, 1y 6.20/6.45 and EUR/GBP 1m 4.20/4.35, 1y 6.20/6.35. If you follow the vol market like I do you will know that this fall (remember it is a US holiday today and there is the “weekend roll” effect, still the extra 1/10 of a vol still leads me to believe that overall the options market is probably LONG overall and thus happy to offer vol out to cover their positions. That and the summer holidays and the complete lack of volatility overall (THANKS YOU CB Governors) leaves the options market at their all time lows (and making news lows daily).

EUR/USD needs to break 1.3500-1.3475 for us to see a change in vol sentiment. Until that happens be rest assured, things are likely to stay the way they are and anyone long vol/gamma will be hurting (pay theta/decay).  I remember back in 2005 when vols in EUR/USD came down to roughly these levels for the summer. It was a disaster. Traders did not know what to do with themselves and trading revenue collapsed. Welcome back to 2005. Pretty it is not!!

I will repeat what I have said a few times previously. If you are a seller of GBP, buyer of foreign currency you would be well advised to look to hedge a “portion” of your book and lock it is. Having said that in EUR/GBP I have eaten humble pie. While I was confident of a break of 0.7950 I never saw it coming this aggressively.  Then again the NFP number yesterday was AWESOME (+288k vs expected +215k) a number the stock market loved and a number the USD loved. The rest as they say was history.

So what for today, well the US holiday will dampen things somewhat. I expect the USD to continue fighting back (vs the EUR) though I would imagine somewhere behind the scenes the CB’s have other ideas. I would be surprised to see the EUR/USD crack 1.3475/1.3500 over the coming weeks. My gut tells me it is not the right time…but hey I have no crystal ball…

EUR/GBP is a winner through and through. GBP traders love GBP and strong PMI numbers and recent rhetoric of rate hikes reinforces the desire to hold GBP (amongst G7 currencies). So I am of the opinion that the rally vs both the EUR and USD and AUD and JPY (etc) will continue unabated for now. There is some serious firepower behind GBP that much is obvious from the price action we have seen in this week especially.

Have a great weekend, good luck and take care