GBP/USD Volatility Expectations Rising, On the Brink of a Range-break
- GBPUSD implied volatility on the rise in the past week
- Trading range over past five weeks at risk of breaking soon
- Break of trend-lines and 13000 to kick off next leg lower
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In the table below, we’ve listed implied volatility (IV) levels for major USD-pairs looking out over the next one-week and one-month periods. Also noted are the differentials between the two, which can help shape expectations and/or identify currency pairs where the options market may be under or over-pricing potential price movement in the short-term. Also outlined, are derived one-week range-low/high prices from the current spot price within one-standard deviation. (Theoretically, there is a 68% probability that price will remain within the lower and upper-bounds.)
Since bottoming on October 6, GBP/USD has gone into a range with a small handful of powerful days, but nothing which led to follow-through. During this period one-week and one-month implied volatility declined to 6.32% and 6.72%, respectively. Since last week it has been on the rise, with current levels of 8.75% (1-wk) and 7.99% (1-mo). Not only have expectations for price movement in cable risen strongly in recent sessions, it also tops the board of major USD-pairs.
The projected one-week one-standard deviation range is 12916-13232. Let’s take a look at how these levels align with the current technical landscape. First off, the range is running on borrowed time, which means a break is likely coming soon. With cable not finding much lift around a pair of trend-lines (March-current, lower parallel – April-current) and the October low it is becoming increasingly likely the break will come to the downside. Should we see a sell-off commence it would also be in-line with the trend off the 9/20 spike-day high which came at a confluence of the gap following ‘Brexit’ and a trend-line running down from July 2014 over the ‘Brexit’ day high.
The projected one-week low is 12916, which isn’t far from the 200-day MA currently at 12872. But the next level of price support doesn’t arrive until under 12800. With that in mind, a breakdown may lead to price expansion and even higher levels of implied volatility. On the top-side, coupling trend direction prior to the multi-week range with overhead levels and the trend-line off the September high, it looks less likely we will see a strong move higher in cable.
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—Written by Paul Robinson, Market Analyst
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