GBP/USD risk reversals shed bearish bias ahead of BOE

• Improvement in the risk reversals gauge points to falling demand for GBP puts.
• Vols at more than one month low

The GBP/USD one-month 25 delta risk reversals gauge climbed to -0.525; the highest level since Oct. 5. The recent low of -0.85 was hit on Oct. 6. The improvement in the risk reversals from -0.85 to -0.525 indicates falling demand for GBP puts ahead of the Bank of England (BOE) rate decision.

The central bank is widely expected to hike rates by 25 basis points today. Most economists expect the Carney to signal that the policymakers are in no hurry to normalize the policy (hike rates further in the near future).

However, markets are positioned for a hawkish language, which is evident from the improvement in the three-month risk reversals gauge.

Meanwhile, the one-month at the money option volatility gauge is hovering at 7.67; the lowest level since late September. The falling volatility indicates the investors do not expect the BOE to deliver a major hawkish/dovish surprise. Vols may drop further if the BOE meets market expectations. 

Risk reversals and Vols chart