The forex trading picture is dominated by Brexit as investors brace for the potential fallout of a Leave vote and what that would mean for the UK economy. Trading sterling on the Brexit vote is fast becoming the hottest (and riskiest) ticket in town as there is significant volatility being see in the price action.

Recent swings in the value of the pound point to heightened uncertainty around the vote as polls show the referendum could yet go either way.

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Obama Effect

 

Sterling jumped on Monday (April 25th), rising to its best level in five weeks after US president Barack Obama weighed into the Brexit debate.

He warned Britain would be at the “back of the queue” for any trade deals with the US if it were to leave the EU.

Obama’s strong support for the Remain campaign bolstered investor confidence in the pound, which had slumped to multi-year lows in recent weeks, but highlighted the fragility of the currency as it’s being pushed around by political statements. The last major move came as political heavyweight Boris Johnson back the Leave camp.

What Will Happen to the Pound?

 

Politicians’ comments may be moving the pound but that’s for good reason – economists are concerned about what will happen if the UK were to leave.

Various bank estimates have put the cable (GBPUSD) down to 1.20 if Britain leaves.

And investors are worried – the cost of buying protection against a drop in sterling has hit its highest in years.

Implied volatility for three-month options contracts is also significantly higher than usual and has gone above levels seen ahead of the 2014 Scottish referendum and the 2015 UK general election.

In other words, traders are nervy about the vote and are prepared to pay more for protection against any major shocks.

Jeff Gundlach, founder of DoubleLine Capital, reckons they’re throwing their money away, but there is genuine concern the UK could vote out.

The costs of protection have fallen since hitting a peak in March, reflecting some easing concerns around sterling.

What the Polls Say

 

As of April 25th, the polls are not showing much to allay fears, even if there is a slight lead for the Remain side.

The Financial Times’ poll of polls shows 44% in favour of staying in, with 42% voting to leave.

What’s concerning for the anti-Brexit camp is that polls are showing some signs of narrowing in the run up to the vote – a this will only lead to greater uncertainty.

And sterling is going to become increasingly sensitive to the polls as we get closer to the election, meaning prices could jump around with each fresh newspaper report. Some traders will enjoy the volatility, while others will want to get out of sterling crosses and turn their trend lines to something else entirely.

With almost two months to go and polls likely to swing, it’s going to be a rough ride trading sterling on the Brexit.