How will GBP/USD trade following the EU vote result announcement? An analysis of the GBP/USD options market gives us a pretty good idea.
The GBP to USD exchange rate is seen edging lower, even after the Federal Open Markets Committee (FOMC) confirmed to markets they are unlikely raise interest rates as aggressively as previously predicted.
The near-term path of least resistance for this pair is lower ahead of next Friday when the results of the EU referendum will be announced.
One thing we are certain of is that major moves are likely on the day.
Those with dollar payments could be in luck as they could see the best exchange rate of the year fall into their lap once the results of the EU referendum are announced.
Or, they could witness the worst.
Should a Leave result be delivered, a sharp and eye-catching slump is forecast to take place.
With GBP traded volatility priced around the time of the referendum at above 40%, the options market is fearing the kind of conditions and market adjustments witnessed during the 2008/09 global financial crisis.
But what are the numbers on the GBP to USD exchange rate that we should be watching?
We can make a pretty good guess as to where the limits to the range in GBP/USD trade will lie.
By observing implied volatility on the options markets, we can observe the numbers being insured against by thousands of traders.
Implied volatility essentially betrays a market that is unsure of where exactly the pound will trade at a given time in the future - the higher the implied volatility the greater the range within which the pound is forecast to trade within.
What we also see then is that uncertainty in the GBP market is at levels last witnessed around the time of the global financial crisis in 2008.
“Readings from the option market prices a 72% chance of GBP/USD trading anywhere between 1.32 and 1.51 on the afternoon of June 24th,” says Chris Turner, analyst with ING in London.
Bloomberg has a useful tool to look at what those volatilities and volatility skews (the preference to hedge against a weaker or stronger GBP) mean for GBP/USD in practical terms.
It shows that the majority of analysts are forecasting GBP/USD to trade towards 1.40, while the options market’s implied probability is between 1.44 and 1.50.
Indeed, we have heard 1.50 mentioned by a number of analysts over recent days.
“Invariably GBP will be very volatile in thin conditions ahead of June 23rd, with polls expected daily and Eurosceptic tabloids expected to back Brexit,” says Turner.
Employment & Earnings Data Hint at a Powerful British Pound Recovery
Sterling was seen trading higher in the mid-week session on some better-than-forecast employment numbers.
The number of people claiming benefits dropped by 4000 in the last month to 746,100, however the April figure has been revised to show an increase of 6,400 due to people claiming the out of work element of the Universal Credit.
Economists and markets were only forecasting a decline by 1000.
Overall, though, the figures are encouraging – the claiming count has dropped by 47,900 on the same period last year.
Unemployment fell by 20,000 in the quarter leading up to April and now stands at 1.67million – the lowest since the spring of 2008. Overall, the unemployment rate now stands at 5%.
The in-work figure has again reached new record levels at 3.5million – which represents the highest figure since records began.
Almost three quarters of people are now in work – another record while the jobless rate is 5% which is the lowest for a decade.
There’s some good news in earnings too.
Including bonuses, three-month average weekly earnings increased by 2% over the last year – 2.3% excluding bonuses.
Pay growth in April itself was 2.5% which the ONS attributes to the introduction of the Living Wage.
The average earnings rate, bonuses included, was only forecast to rise 1.7%.
"The data was welcome news to pound bulls who have seen UK economy decelerate over the past few months on fears of Brexit. The risk of UK leaving the EU still remains significant and the latest swirl of polls suggests that vote is too close to call, but should UK economy survive the Brexit vote, the underlying fundamentals appear to have been relatively unscathed by the political trauma and cable could pop substantially on a Remain win," says Boris Schlossberg at BK Asset Management.
However, we should expect any GBP strength to be short-lived and most analysts confirm that the currency should edge lower ahead of the vote.
"The GBP-USD may be faced with an uphill grind if it is to overcome the 1.4200 handle, especially with the referendum looming," says Emmanuel Ng at OCBC Bank. "Overall, the path of least resistance for cable may remain oriented towards the downside in the near term. Look for a descent to 1.4050 ahead of 1.4000 if 1.4100 is violated."