Good morning

Well well well!! Interesting start to the day.

EUR/USD through 1.3400 and GBP/USD at 1.6885 (EUR/GBP 0.7935 from 0.7980). While I wrote yesterday USD IS KING, I did say that GBP on its own remains a crowd favorite given the superior economic conditions and the flight into GBP.

EUR PMI 54.2 from 54.4 / GBP PMI 59.1 from 57.7  (8 month high) again reinforcing the UK’s strength in comparison to our European neighbours.  This is NOT a USD move but rather a EUR/GBP move and again reinforces our thoughts that as things stand Europe still has some way to go before catching up (economically) with the UK and US.

GBP traders will (in my opinion) continue to buy the pound vs the eur and will in all likelihood test 0.7900 (1.2658) psychological levels again. Having spoken in length to the aforementioned people, they are in agreement and are in fact positioning  for an even greater move below these levels. The FX Options market remains in limbo with vols remaining at the previous lows with little desire to own gamma as things stand. Opt traders prefer to remain sellers of vol and use the spot market to “do the talking”.

The positive data added to indications that the economic recovery in the U.K. is deepening, fueling expectations that the Bank of England will raise interest rates before the end of the year. We do however expect them to keep rates on hold going into this Thursday’s meeting.

Looking at some of the Options numbers, vols have for all intents remained pretty “quiet” over the past few weeks. Despite the recent USD strength, the options desks have remained net sellers of options (earn premium). The reasons remain quite simple, there is just not enough daily volatility to warrant buying vol right now. We are now firmly in the middle of the summer and this in itself is adding to recent malaise. What’s the point of buying insurance when you are still in a position to control the risk adequately. As I have noted previously, it is only once we start to test the 1.3000 mark that I expect vols to pick up and for the overall perceptions to change. Granted this will start around 1.31-1.32 but we still have 200 pips to go before we see this change.

ECB meeting on Thursday (incl. conference) will be interesting. Again we await Draghi (ECB Gov.) comments on what they are prepared to do to re-ignite the Eurozone. They are going to find it challenging at best given that they really need to see the USA and China boost their Economies (consistently) before that trickles over to Europe. So for now I do not expect much change in his rhetoric and game plan.

Good luck