GBP/USD Options Markets show Traders see Less Chance of a 'No Deal'

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The foreign exchange options market - which offers closes on the near-term outlook for the British Pound - shows traders have now scaled back expectations for a disruptive 'no deal' scenario to trade talks.

Implied volatility - which is the option market's gauge of actual volatility at a future point - is coming down, according to Richard Pace, a foreign exchange options analyst at Thomson Reuters.

The higher the expectation for a big move in a currency at a future date, the more expensive it becomes to buy options in that currency.

The cost of insuring on future volatility in Sterling has fallen from Friday's extremes says Pace, after solid gains last week.

Reuters data shows one-week expiry implied volatility is down 6.0 to 17.5 and one-month by 1.1 to 13.4 so far.

"That shows dealers expect less actual volatility, and that the risk of a no- deal Brexit has diminished, at least for now. If a UK/EU trade deal were to be realised, implied volatility would collapse as event premiums are priced out, but we aren't at that stage yet," says Pace.

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The EU and UK agreed at the weekend to extend post-Brexit trade negotiations, thereby vaulting a Sunday deadline set by the EU side for talks to make progress.

The development has sparked a notably higher British Pound at the start of the new week, but analysts say a lack of a deadline imposed by negotiators means talks could run right through until December 31.

"One-week and one-month implied volatility remain far above levels around 10.0 from early December, but if trade talks drag on toward the Christmas holiday, selling short-dated expiry options to bank premium in the interim could prove prudent for the brave," says Pace.

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