CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 69% of retail investor accounts lose money when trading CFDs with this provider. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.
CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 69% of retail investor accounts lose money when trading CFDs with this provider. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.

European Open: GBP implied volatility spikes ahead of UK CPI and FOMC

Article By: ,  Market Analyst

Asian Indices:

  • Australia's ASX 200 index rose by 48 points (0.67%) and currently trades at 7,251.30
  • Japan's Nikkei 225 index has risen by 214.5 points (0.77%) and currently trades at 28,169.35
  • Hong Kong's Hang Seng index has risen by 182.69 points (0.93%) and currently trades at 19,778.89
  • China's A50 Index has risen by 88.92 points (0.68%) and currently trades at 13,193.59

 

UK and Europe:

  • UK's FTSE 100 futures are currently up 4.5 points (0.06%), the cash market is currently estimated to open at 7,507.39
  • Euro STOXX 50 futures are currently up 6 points (0.15%), the cash market is currently estimated to open at 3,992.83
  • Germany's DAX futures are currently down -1 points (-0.01%), the cash market is currently estimated to open at 14,496.89

 

US Futures:

  • DJI futures are currently up 114 points (0.33%)
  • S&P 500 futures are currently up 46 points (0.39%)
  • Nasdaq 100 futures are currently up 14.25 points (0.35%)

 

 

Whilst sentiment was uplifted for Asian equities overnight, the moves were predictably not outlandish given the pending FOMC meeting today. The ASX is currently on track for its best day in 10 following softer-than-expected CPI print from the US. Yet the day’s trading volume remains on the low side which shows an air of caution ahead of the FOMC meeting.

 

Have the market over-reacted to CPI ahead of FOMC?

For the second month running US CPI data was softer than expected, effectively handing the Fed an early Christmas present and providing less reasons to doubt a 50b hike this week. At 7.1% it remains historically high, but good to see that it is trying to at least meet the Fed’s interest rate halfway.

I think there’s a danger that markets have over-reacted to the CPI data and that the Fed will deliver a more hawkish message than is currently being priced in. We know they need to upwardly revise their dot plot, so the median rate for 2023 will be a core focus for many. And there’s still a reasonable chance the Fed may need to raise rates above 5% - as much as I’d prefer they didn’t.

 

Implied volatility spikes ahead of today’s FOMC meeting

The USD and JPY were the strongest majors overnight and NZD and AUD were the weakest, as markets retraced against some of their post-CPI moves form yesterday. However, implied volatility has spiked for the majority of FX majors, and most notably on GBP as it has inflation data shortly as well as the FOMC meeting to contend with. GBP/USD’s IV reached a 3-year high of 24.9% annualised (which roughly equates to a 1-day IV of +/- 165 pips).

The consensus is for the UK inflation to rise 10.9% y/y from 11.1 previously. But if you look at the inflation chart there is no immediate signs of a top – and even if it ‘falls’ to 10.9 it is still very high indeed. So I’m bracing myself for an upside surprise which will pile on the pressure for a more aggressive response from the BOE on Thursday (whether that be signalling a higher terminal rate or going back in with another 75bp hike).

 

GBP/USD 1-hour chart

GBP/USD is within an established uptrend on the 1-hour chart, and it spiked convincingly above the August high with rising volumes following US inflation data. Prices have pulled back with lower volumes which suggests the move is corrective, and support has been found around the daily pivot point and 1.2344 high. The pair looks ripe for another leg higher, where a hot CPI print could help it begin – otherwise a dovish FOMC meeting may be required to help it higher. Clearly, the downside risks for GBP today are a soft inflation print and a hawkish FOMC meeting.

 

Economic events up next (Times in GMT)

 

 

StoneX Financial Ltd (trading as “City Index”) is an execution-only service provider. This material, whether or not it states any opinions, is for general information purposes only and it does not take into account your personal circumstances or objectives. This material has been prepared using the thoughts and opinions of the author and these may change. However, City Index does not plan to provide further updates to any material once published and it is not under any obligation to keep this material up to date. This material is short term in nature and may only relate to facts and circumstances existing at a specific time or day. Nothing in this material is (or should be considered to be) financial, investment, legal, tax or other advice and no reliance should be placed on it.

No opinion given in this material constitutes a recommendation by City Index or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person. The material has not been prepared in accordance with legal requirements designed to promote the independence of investment research. Although City Index is not specifically prevented from dealing before providing this material, City Index does not seek to take advantage of the material prior to its dissemination. This material is not intended for distribution to, or use by, any person in any country or jurisdiction where such distribution or use would be contrary to local law or regulation.

For further details see our full non-independent research disclaimer and quarterly summary.

CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 69% of retail investor accounts lose money when trading CFDs with this provider. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money. CFD and Forex Trading are leveraged products and your capital is at risk. They may not be suitable for everyone. Please ensure you fully understand the risks involved by reading our full risk warning.

City Index is a trading name of StoneX Financial Ltd. Head and Registered Office: 1st Floor, Moor House, 120 London Wall, London, EC2Y 5ET. StoneX Financial Ltd is a company registered in England and Wales, number: 05616586. Authorised and regulated by the Financial Conduct Authority. FCA Register Number: 446717.

City Index is a trademark of StoneX Financial Ltd.

The information on this website is not targeted at the general public of any particular country. It is not intended for distribution to residents in any country where such distribution or use would contravene any local law or regulatory requirement.

© City Index 2024