Forex trading – Brexit polls driver sterling volatility to new peaks

The febrile atmosphere predicted for forex markets ahead of the Brexit vote on June 23rd is rearing its head already, as sterling volatility approaches its highest level since the financial crisis. The cost of insuring against wild gyrations in the value of the pound has jumped as traders get increasingly twitchy about how the referendum will pan out.

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Volatility

 

One-month implied volatility as measured by the cost of insuring against swings in sterling versus the dollar has risen to more than 23% - the first time it’s risen above 15% since 2010 and the highest since the peak of the financial crisis in late October 2008.

Previously we noted that the implied volatility for three-month options contracts rose above levels seen ahead of the 2014 Scottish referendum and the 2015 UK general election. The one-month options are now coming into play as we get closer to the vote itself. The recent rise means one-month volatility is set for its biggest ever quarterly increase.

Sterling itself has been on a fairly rough ride, with daily swings of more than 1% not uncommon. Although GBPUSD has gradually trended higher since its mid-February trough, rising 7 cents, or around 5%, since plumbing multi-year lows around $1.38.

Polls

 

Driving much of the volatility are the polls. The one-month volatility spiked to 22% after a YouGov poll showed just 41% of Britons wanted to remain in the EU. Sterling dipped as much as 1.2% after the release of the survey. Meanwhile, an ICM poll showed 48% of Britons would vote to leave the EU. Previously, a poll showing a healthy lead for Remain lifted sterling to its best level in weeks.

Polls are hard to follow and are often contradictory, making the job of the forex trader a lot harder.

For many traders and observers, betting odds are a better guide than polls. While the latest odds still favour Remain, there has been a shift towards Leave. From about 19% in May, the odds of Britain voting to leave have risen to nearly 30% in June. If Britain leaves the EU, several big banks and the National Institute of Economic and Social Research predict sterling could slump by as much as 20% if Britain votes out.

Data Shrugged

 

Brexit is the prime driver in the market and some stellar manufacturing figures were largely ignored.

UK manufacturing output was up 2.3% in April, the biggest rise since 2012, according to the Office for National Statistics. Overall, industrial output rose 2%, assuaging fears that the looming Brexit vote had cooled business activity and investment decisions.

There is lots more UK data due out in the fortnight before the referendum, but traders can expect Brexit polling and expectations for the vote to dominate proceedings.

Added market volatility means increased opportunity but also more risk. To reflect this, ETX Capital may be increasing margin rates on certain markets.