GBP/USD - Neutral bias in options market ahead of UK Mfg. PMI

• GBP/USD Risk reversals and Vols drop, suggest neutral bias.
• UK Jan Mfg. PMI due at 09:30 GMT.

GBP/USD ran into bids at 1.3980 on Tuesday and jumped to 1.4233 yesterday, adding credence to Tuesday's bullish outside day candle and indicating scope for a break above the recent high of 1.4345.

However, the options market has turned neutral, signaling range bound action ahead/neutral bias. The GBP/USD one-month 25 delta risk reversals are paid at -0.2 GBP puts. Just a week ago, FX dealers were demanding a record high volatility premium for GBP calls (+0.4), but have since returned to a neutral to negative bias (negative risk reversals indicate puts are in demand).

Also, the one-month at the money (ATM) option volatility gauge hit a one-week low of 8.75 today, i.e. dealers are selling GBP vols, meaning the market does not expect big moves in the GBP in the short-run.

That said, a better-than-expected UK Jan manufacturing PMI could lift GBP/USD. However, only a convincing move above the recent high of 1.4345 could revive demand for GBP calls and push up vols. On the other hand, a big miss on the data could set the GBP/USD on track towards Tuesday's low of 1.3980. A violation there could strengthen the demand for GBP puts.

GBP/USD Technical Levels

The spot traded just below 1.42 levels in Asia. A close below 1.4145 (1-hour 100-MA + 1-hour 50-MA) would open up downside towards 1.41 (1-hour 200-MA) and 1.4083 (Jan. 25 low). On the other hand, a move above 1.4233 (resistance on the 1-hour chart) could yield 1.4287 (Jan. 26 high). A violation there would expose the recent high of 1.4345 (recent high).