Sterling volatility surges as Brexit concerns continue to amplify
14/Jun/2016 • Currency Updates•
One-month implied volatility in the EUR/GBP currency pair soared to its highest level on record yesterday, as concerns regarding a possible exit from the European Union continue to intensify.
Following the release of an ORB poll on Friday evening, which gave the ‘leave’ camp a sizable 10 percentage point lead, investors have begun accepting that next week’s vote on EU membership could be much closer than originally anticipated.
Implied volatility for EUR/GBP exceeded its financial crisis peak in 2008 yesterday, while the same measure for GBP/USD also rose to just shy of an all-time high. This continues to highlight the benefit of hedging in order to mitigate any potential downside risk.
Betting markets have now lowered their chances that Britain will vote to ‘remain’ on 23 June, with implied probability for the vote to stay in the EU falling to around 68% on Monday, down about 10% in just one week.
Speculators have also continued to ramp up bets that the UK currency could depreciate post-referendum vote. Net short positions for Sterling increased at the fastest pace in nearly five years in the week to 7 June, suggesting that a growing number of traders now expect the Pound to weaken sharply should Britain opt to leave the EU.
This week is shaping up as an unusually busy one in the currency markets, with a number of high profile announcements likely to have a significant influence on the major currencies.
Wednesday evening’s Fed meeting and Thursday afternoon’s Bank of England meeting will be the highlights. In the meantime, inflation figures out of the UK this morning and this afternoon’s retail sales in the US could prove market movers.
Major currencies in detail:
The looming threat of a Brexit sent Sterling to an eight-week low, with the Pound falling by 0.4% against the US Dollar this morning.
Another referendum poll released by ICM yesterday failed to alleviate concerns regarding the outcome of the vote. The poll showed that 47% would vote to remain in the EU, with 53% in favour of leaving. Sterling has continued to lose value since the polls swung in favour of the vote to ‘leave’ last week.
We expect the next few opinion polls to move the Pound even more aggressively, given there is now just over a week until referendum day.
Inflation figures in the UK this morning are expected to show a very modest improvement in May, although will remain significantly below the central bank’s target level.
The Euro fell sharply this morning in line with Sterling, declining by 0.35% versus the Greenback.
Announcements in the Euro-area continue to take a back seat, with developments in the UK and US taking centre stage at present. With no change in monetary policy likely from the ECB in the near term, investors and analysts are focused on political news in Europe, including the Spanish General Election in less than two weeks’ time.
On Monday, the head of Germany’s central bank Jens Weidmann called for patience from the ECB and dismissed the need for further easing measures in the Eurozone.
Eurozone industrial production figures this morning will be the only major economic release in the Euro-area today. A positive surprise in the data could alleviate some pressure on the ECB to increase its stimulus measures in the coming months.
The US Dollar rose sharply by 0.35% this morning, continuing the currency’s strong gains from last week.
There were no economic data releases or announcements in the US on Monday, with investors continuing to focus on their expectations for the timing of the next interest rate hike in the US.
Financial markets have now completely discounted the probability of a rate hike by the Fed next week, with the next rate increase not priced in until December.
Retail sales figures this afternoon will be the last major economic data release before Wednesday’s FOMC meeting. A disappointing number could push back expectations for the next interest rate hike even further, ahead of tomorrow’s Fed meeting.
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