BUZZ-COMMENT-BoE and the GBP reaction - according to FX options

Feb 5 (Reuters) - Overnight options expire on the next working day at 10 a.m. in New York/1500 GMT and now include Thursday's Bank of England policy decision and monetary policy report. Their premiums will therefore offer clues about the expected reaction in related currency markets.

FX volatility is an unknown yet key part of an FX option premium so implied volatility is used as a substitute. Any disparity between implied and actual/realised volatility makes FX volatility a tradable asset, while implied volatility will also indicate changes in sentiment and impending volatility risks.

Since including Thursday's Bank of England policy decision, overnight expiry GBP/USD implied volatility is unchanged around 14.0 - a premium/break-even for a simple vanilla straddle of 73 USD pips in either direction. The lack of additional volatility risk premium shows that dealers are not expecting the BoE decision to add any GBP related volatility.

Interest rate futures are pricing a 25 bps cut from 4.75% to 4.5% on Thursday and a total of 84 bps of reductions throughout 2025. The vote split is expected to be 8-1 on Thursday versus 6-3 in December.

For more click on FXBUZ