GBP/USD: Brexit anxiety boosts demand for GBP puts (bearish bets)

• GBP dropped in Asia on Brexit anxiety - four UK ministers are on the verge of quitting. The EU rejected the latest plan.
• Brexit uncertainty boosted demand for GBP puts options (right to sell the asset), meaning investors are likely expecting more weakness in Cable.

The GBP/USD gapped lower in Asia as rhetoric-heavy Brexit headlines over the weekend squashed hopes of November deal.

The Sunday Times reported yesterday that four pro-EU British ministers are on the verge of quitting. The report also said that the European Union (EU) rejected May's plans for an independent mechanism to oversee Britain's departure from any temporary customs arrangement it agrees.

As a result, cable opened at 1.2915 in early Asia and rose to a high of 1.2947. The gains, however, could be short-lived, courtesy of Brexit uncertainty. Moreover, the Irish border issue remains a stumbling block in Brexit talks.

Also, the implied volatility premium for the GBP puts has risen sharply. The one-month 25 delta risk reversals (GBP1MRR) are currently being paid at 1.087 GBP puts vs 0.817 GBP puts.

The growing demand for GBP puts (bearish bets) indicates the investors are likely expecting a deeper drop in the currency. At press time, the GBP/USD pair is trading at 1.2930.

GBP1MRR

GBP/USD Technical Levels