Pound expected to move significantly both in the event of “Brexit” and “Bremain – MUFG

Lee Hardman, Currency Analyst at MUFG, suggests that the pound remains both weaker and more volatile in the run up to the EU referendum on the 23rd June in line with our expectations.

Key Quotes

“The trade-weighted pound has declined sharply by around 9% since late last year driven primarily by the market discounting a substantial Brexit risk premium which we currently estimate at just over 5%. Brexit uncertainty has prompted a spike in short-term implied pound volatility which has reached its highest level since during the peak of the global financial crisis making the cost of hedging increasingly expensive. Demand for pound downside protection even exceeds levels during the global financial crisis.

As we move closer to the day of the referendum, market participants will increase their focus on how the results will be released. The direction of travel for the pound should already be established heading into the European trading session in advance of the national declaration which is estimated at around breakfast time on the 24th June. The Electoral Commission cautioned that there is considerable uncertainty about when this will be, given that it is dependent on all 382 local totals being declared. The final local declarations, which are estimated to take place between 6.00am and 7.00am, would take on even greater importance if the national result was still in the balance.”