GBP/USD: Options market turns bullish on Sterling for first since January 2018

• GBP/USD risk reversals hit the highest level since January 2018.  
• The options market has turned bullish on Sterling for the first time in nearly two years.  
• Investors are likely anticipating  a Brexit breakthrough and adding bets to position for a rally in Sterling.  

The options market has turned bullish on the British Pound (GBP) for the first time since January 2018, a sign the investors are anticipating Brexit breakthrough and adding bets to position for a rally in Sterling.

One-month risk reversals (GBP1MRR), a gauge of calls to puts on the GBP, rose above zero on Friday and currently stands at 0.25 – the highest level in 21 months.

A positive number indicates the volatility claimed by the call options (bullish bets) is higher than the volatility claimed by the put options (bearish bets). Put simply, the market has turned bullish on Sterling after a gap of nearly two years.

Focus on Brexit

The probability of Britain securing an orderly exit from the European Union this week has dropped following comments  by Finland’s Prime Minister that the time has run out.

Even so, the British Pound may remain better bid as there are renewed mutterings about another Brexit summit, possibly around the end of the month, according to the BBC.

Also, the GBP may find bids if the UK Average Earnings (Aug) blow past expectations. The data is scheduled for release at 08:30 GMT.

If the data disappoints expectations and Brexit sound bites turn pessimistic, the GBP/USD may drop sharply. The fall may be accentuated by the unwinding of the bullish bets (call options). As of writing, the pair is trading at 1.2618, representing marginal gains on the day.  

GBP1MRR

Technical levels