Brexit uncertainty to stress the GBP – Nomura

By FXStreet FXStreet (Delhi) – Research Team at Nomura, suggests that in addition to the risk-off sentiment and likely further delay of the BoE rate hike, uncertainty about the Brexit referendum has been also putting pressure on GBP.

Key Quotes

“In the option market, GBP/USD implied volatilities have been in an uptrend since mid-December. We expect the referendum to be held in September and assign just a 25% possibility of the UK leaving the EU. Thus, Brexit is a tail risk scenario to us. Even though we think in the end UK voters are likely to choose to remain in the EU, uncertainty about the result ahead of the referendum should still work negatively for GBP.

EUR/GBP traded about 10% stronger than the 2yr rate spread suggested when the euro area crisis intensified from 2010 to mid-2012. In contrast, greater uncertainty ahead of the Scottish referendum and UK general election in 2015 weakened GBP against EUR, albeit temporary, more than the rate spread suggested at the time.

The past relationship suggests a 25bp widening in the 2yr rate spread can be completely offset if 3m GBP/USD implied volatility rises by 2% relative to EUR/USD volatility. While the 2yr rate spread has been stable recently, …read more

Source:: FX Street