I posted earlier on HSBC calling for a much lower GBP: HSBC says UK Brexit politics the GBP driver - 'no deal' risk - see GBP/USD to 1.26
Here is an interesting view from Société Générale as a counter (Forex & Derivatives Strategy). I have summarised:
The lower spot provides the opportunity to Buy distant OTM calls, as the GBP risk is now getting very asymmetric.
Several factors minimise the bearish case in the medium term but could still fuel massive upside:
- The BoE is showing its hawkish teeth on the back of higher inflation prints
- Slower Brexit negotiations. Theresa May's 22 September speech sounded optimistic, proposed a two-year transition period for Brexit, and pushed to find a creative solution to the trade negotiations. The market would be reassured in the meantime if the UK economy stands firm, preserving cable's positive correlation with the strengthening euro.
- According to CFTC data, the market has been net short sterling futures for almost all of the last three years but switched to a long last week
- Positive tail risk. The minimal but existing probability that Brexit does not happen or is implemented in a way that convinces the market that it will do no harm at all justifies trading such a scenario via cheap options
We fundamentally view asymmetric odds in favour of the topside case, and this highlights the current cheapness of GBP/USD OTM calls
