Topside GBP/USD options look cheap as 1.30 risk increases

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Nov 21 (Reuters) -GBP/USD FX option implied volatility hasn't increased with realised volatility measures amid the GBP/USD rally through 1.2500, which makes options look cheap amid talk about the heightened risk of a rapid extension through 1.3000.

Option traders at Societe Generale advocate a 2-month expiry GBP/USD 131.00 One Touch at a cost of 10% of total payout. It would increase in value as GBP/USD spot and/or implied volatility increase, and pay out the full amount if GBP/USD trades at 131.00 before expiry.

The option traders acknowledge the negative sentiment that weighs on GBP, but note the risk of a faster than expected rally to 1.3000 should there be any GBP positive surprises to come. With growth projections of just 0.4%, the UK is expected to be one of the slowest growing economies next year, but the bar is therefore low for data to beat expectations.

The bank also highlights the converging rate expectations between the U.S. and UK, but thinks the market might be too hawkish regarding the growth and inflation paths between the two economies. Only on Tuesday, the Bank of England governor was once again pushing back against the markets' pricing of rate cuts.

Societe Generale option traders note that GBP/USD is already breaking free from monetary policy expectations and if the next GBP/USD leg comes from GBP strength opposed to recent USD weakness, GBP/USD could go much higher.

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2-month GBP/USD implied vs realised volatility

(Richard Pace is a Reuters market analyst. The views expressed are his own)


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