Trading UK Political Risks: From Betting Odds to GBP Vol Spreads

Crédit Agricole CIB outlines a strategy to hedge upcoming UK political risks by buying 6M-12M GBP/USD vol spreads. The report highlights that a potential leadership victory by Andrew Burnham poses the greatest downside risk to the Pound.

Key Takeaways

• 1.The next 3-6 months are critical for the UK political outlook, centered on a June by-election and potential Labour leadership transition.
• 2.An Andrew Burnham victory represents the most significant downside risk for the GBP, with targets as low as 1.25 for GBP/USD.
• 3.GBP/USD implied volatility appears historically cheap and is trading near the bottom of its 5-year range.

Table of Contents

• GBP: crucial few months ahead
• UK political risks and the FX vol market
• We expect no Mini-Budget replay, but it is a useful template
• GBP vols – rich vs cheap analysis
• Flatter vol curves not flattering the GBP
• Trading the UK political risks
• FX Research advanced tools
• Red Mount Analytics

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