GBPUSD – 3 Months to the Brexit Referendum
Three months from today, June 23 2016, the UK votes on whether to remain a member of the European Union. A decision to leave could have a profound impact on the UK economy and the Great British Pound (GBP) in particular. FX markets hate uncertainty and continued volatility looks the norm for the next three months or until one side or the other in the Brexit (“British Exit”) debate takes a significant lead.
Earlier this month the BOE announced that it would make extra cash available to banks around the time of the referendum. The extra cash is designed to help the financial industry to keep ticking over during possible periods of market turbulence or when there might be a risk of a “credit crunch” Currency markets have already been rocked by fears that Britain could leave the 28-member bloc, with the GBPUSD dipping to seven and a half year lows.
So where now for GBPUSD? – Markets have pushed BoE tightening expectations out to Q1 next year, and have built in Brexit risk premium. The latest Poll of polls tracker has 43% in favour of remaining in the union, 41% wanting to leave and 16% undecided, little changed over the last couple of weeks.
The GBP was last surrounded with such political uncertainty in the run to the September 2014 Scottish Referendum. Now, like then, the assumption was the UK government would prevail. It did in 2014 but the vote was MUCH closer than opinion polls or the general public had anticipated. This time the two opposing camps start much closer and the momentum, with three months to go, lies with the UK out campaign. The assumption is that many voters will settle for the status quo as the safe option. However, with the ruling Conservative party and government deeply divided on the issue (6 members of the cabinet, together with the highly influential Boris Johnson are campaigning for exit) and one cabinet member has actually resigned (although not directly over the Brexit debate), nothing can be taken for granted.
The tragic events in Brussels yesterday also added to GBP’s woes. We see continued depreciation for the GBP in the next three months. The news today reaffirmed our view, overseas investors will continue to reduce their holdings of UK assets, or continue to hedge those holdings because of the volatility and uncertainty surrounding the vote. The cost of hedging the GBPUSD increased by 14.50 percent today as the GBPUSD3M Option soared in value. This is the Option that covers the June 23 vote.
The Monthly Chart above shows the intact down trend with 1.3500 not unrealistic within the next three months.
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Janne Muta
Chief Market Analyst
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About Janne Muta, HotForex’s Chief Market Analyst
Janne Muta is a seasoned industry professional with over 16 years experience in the global markets. Originally from Finland, Janne has worked for institutions in both Helsinki and London as an institutional fund manager, global market analyst and FX educator.
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