British Pound Recovers from Sun Meltdown on Strong Wage Growth Data, Seen Up vs Euro and Dollar

The GBP is in recovery mode 24 hours after the currency was hit by fresh polling data and news that the Sun newspaper has decided to support Brexit.

• Pound to euro exchange rate today = 1.2646, yesterday's low = 1.2541
• Pound to dollar exchange rate today = 1.4196, yesterdays low = 1.4107
• Pound to Australian dollar exchange rate today = 1.9183, yesterday's low = 1.9097
• The euro to dollar exchange rate today = 1.1228, yesterdays low = 1.1188

After a rough 24 hours pound sterling has stabilised above 1.41 against the US dollar and 1.26 against the euro.

Caressing the pound higher is sentiment - markets are taking a break from the Brexit saga it seems. How can we be sure this is the case?

Look at the euro / dollar rate - it too is higher today. Of late the EUR/USD has been a proxy for referendum fear as markets begin to see the downsides to the EU of a Brexit.

That it has recovered suggests Brexit fear is in the backseat for now. "However, in the event that the polls provide strong indication that the UK is heading for the Brexit door, the pound sterling will resume its free fall and move towards the $1.30," warns analyst Yann Quelenn at Swissquote Bank, warning on just how far the pound to dollar rate could go in coming days.

Also aiding the GBP recovery was news that UK employment and earnings data smashed expectations.

A full account of the data can be found here. What is important to note is that the UK economy is in pretty good shape heading into a potential divorce from Europe.

Latest Pound/Euro Exchange Rates

	Live: 1.1455▲ + 0.1% 12 Month Best: 1.2162
*Your Bank's Retail Rate	1.1066 - 1.1111
**Independent Specialist	1.1295 - 1.134 Find out why this is a better rate

* Bank rates according to latest IMTI data.

** RationalFX dealing desk quotation.

 

Sterling suffered on Tuesday after The Sun, a newspaper with an impressive knack of picking the winners of big UK votes, has come out in favour of the Leave campaign just days before the UK's EU referendum.

In an editorial entitled “We urge our readers to beLeave in Britain and vote to quit the EU on June 23,” the paper says, “outside the EU we can become richer, safer and free at long last to forge our own destiny - as America, Canada, Australia, New Zealand and many other great democracies already do. And as we were the first to do centuries ago.”

If the Sun has picked a winner again, then we can expect incredible volatility in sterling over coming weeks.

We say volatility as there is quite a bit of uncertainty as to how GBP would react to an UK exit. For example, in this must-read piece, the pound could soar to 1.40 and above against the euro on Brexit.

"Another shot in the arm for the Leave campaign as The Sun announced it is backing the Out vote," says Joe Rundle, Head of FX Trading at ETX Capital. "Bookmakers are shortening odds fast and there is now the real chance that the 'Leave/Brexit' outcome could be the favourite bet come the weekend given the seemingly unstoppable momentum for Vote Leave."

ETX Capital have themselves shortened odds on their Brexit market after the recent run of polls.

"For traders the biggest thing to contend with is that the result is being announced on a normal trading day – a stock market meltdown is not impossible if the vote goes against Remain. Enormous gyrations in stock, bond and currency markets is an almost certainty," says Rundle.

Meanwhile, fellow spread betting company IG have also announced they have seen a sharp move to Leave on their markets.

"The move in the polls has been matched by a noticeable shift in the IG Brexit binary, with clients now thinking that the chance of the UK voting to leave has now hit 40.5%, up from the low 30s yesterday. What is interesting is, despite the sharp selloff in sterling in recent days, the pound is still holding on above $1.41. Either this is a symptom of limited volumes as traders abandon the field, or a sign that the market still thinks the status quo will win out in the end," says Chris Beauchamp at IG.

Volatility Spikes

The big issue we are witnessing is the rise in implied volatility in sterling options markets.

Implied volatility essentially tells us how much markets are expecting a certain currency pair to move at a given point in the future. The higher the volatility - the wilder the ride.

The Credit Suite Interest Rate Volatility (CIRVE) Index was up 5.9 pts wk/wk while the GBPUSD 1M implied volatility increasing another 6 vol points to 27% - now just 2 vol pts below its all time high of 29% reached during the depth of the 2008 Financial Crisis.

“Bearish sentiment in GBPUSD has hit a new extreme: the 1M 25-delta put vol is trading at an 8+ vol pt premium over the 25-delta call,” say Credit Suisse in a client brief.

The spread is more than double the previous extreme of 4 pts we saw in 2008 - at the height of the global financial crisis.

The Polls

ICM Unlimited have released their latest bi-monthly polling results on EU referendum voting intentions.

The results are not very GBP-friendly - Leave enjoy a 53%-47% advantage once “don’t knows” are excluded.

This compares with a 52%-48% split reported by ICM a fortnight ago and confirms where momentum lies

The pound headed lower following the release of the poll and was seen trading towards 1.2583 against the euro and 1.4212 against the dollar.

Opinium's poll for the Bruges Group showed 52% would vote to Leave, while 33% would vote to Remain. This implies a whopping 15% of peopler are undecided - exactly why big events like the Sun coming out in favour of Leave could play a big role in the outcome.

The most recent YouGov / The Times EU referendum voting intention poll showed Leave on 46%, Remain on 39% and undecideds on 11%.

Although the latest polls suggest that public opinion in the UK has swung in favour of voting to leave the EU, the weight of money being wagered on the outcome still implies that a Brexit would come as a big surprise.

Betfair continue to see chances of the UK staying in Europe at around 65%-70%.

"Admittedly, bookmakers’ odds on a Brexit have shortened somewhat over the last few days. But they still put its probability at only around a third," says Alex Holmes at Capital Economics.

Assuming there is little difference between the views of those “betting” with the bookmakers and those “investing” in the markets, a Brexit could therefore still have a major effect on the value of the UK’s currency, equities and bonds.

“We wouldn’t be surprised if the exchange rate fell swiftly to $1.20 in the event of a Brexit,” says Holmes.

UK Inflation is a Sideshow

Regarding the big data event of the week we saw inflation numbers come in just below expectation.

UK inflation data remains arguably the most important data release for the Bank of England whose key mandate is to target a 2% rate of inflation.

When inflation heads back to this bracket the Bank will have to start raising interest rates, and higher rates will prompt a stronger GBP.

However, the latest release of UK inflation data shows inflation remains flat.

Monthly inflation for May read at 0.3%, below the 0.4% forecast by analysts.

With focus being exclusively referendum driven it is no surprise sterling hasn't reacted to the data.