Market players were buying euro/sterling options last week to capture a rise in implied volatility sparked by choppy spot trading. Sterling gained against the single currency to GBP0.6921 last Wednesday. The pair's volatility was caused by U.K. interest rate uncertainty, according to traders. Doubt over the direction of U.K. rates was fuelled by the publication on Wednesday of minutes from the Bank of England's monetary policy committee meeting, which showed its vote to hold rates was not unanimous.
The flurry of short-dated option buying pushed overnight implied volatility to 8.1% Thursday, compared to 6.5% the previous day. Traders said speculative players were buying overnight and one-week options with at-the-money strikes, although some traders reported players buying euro calls at GBP0.70 and GBP0.71.
The focus on euro/sterling was unusual because the pair is often neglected. "It is sandwiched between cable and euro/dollar, so you need very significant events in sterling to provoke a move," a trader explained, noting players were looking to take profit from rising volatility rather than punting on directional moves.
Robin Wilkin, foreign exchange technical analyst at JPMorgan in London, described euro/sterling trading last week as a bat and ball game between bulls and bears. A move higher by the euro against sterling could push the pair out of its range, said Wilkin, but he added it was not clear if there was momentum in the market to support this move.
