GBP/USD - risk reversals decline ahead of UK CPI, focus on 2Y yield spread

• Bearish bias in GBP/USD options market continues to strengthen.
• UK CPI is seen rising 3.1 percent over the year in October.
• Changes in 2Y yield differential likely to impact GBP/USD pair.

Cable did take a hit on Monday on the back of political uncertainty but managed to close above the 100-day MA. The spot traded above the 100-day MA level of 1.3112 in Asia but struggled to gain altitude.

Risk reversals drop

The one-month 25 delta risk reversals fell to -0.725; the lowest level since Oct. 11. The decline from the recent high of -0.475 indicates strengthening bearish bias (increased demand for GBP puts).

Focus on UK CPI and 2-year yield differential

The Office for National Statistics (ONS) data due today is expected to show the consumer price index (CPI) rose 3.1 percent over the year in October. The core inflation is seen rising 2.8 percent on year vs. previous month's print of 2.7 percent.

As said by Bank of England's (BOE) Andy Haldane, UK CPI is likely to stay above the target 'for the next few years'. Thus, an uptick in the CPI would not be a surprise, still, it could strengthen the bid tone around the British Pound. The inflation-led gains may last longer if the 2-year US-UK yield differential breaks above the recent high of 120 basis points.

Meanwhile, a weaker-than-expected inflation would force markets to scale back expectations of the next BOE rate hike and thus lead to GBP sell-off.

Also, traders need to keep an eye on the Brexit related news flow and the domestic political chaos.

GBP/USD Technical Outlook

The daily chart shows the pair has been moving in falling channel. A break above 1.3139 (10-day MA) would open up upside towards 1.3180 (Nov. 13 high) and 1.3196 (falling channel hurdle). On the downside, breach of support at 1.3312 (100-day MA) could yield a pullback to 1.3062 (previous day's low). A violation there would expose falling channel support of 1.30 (also the psychological support).