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Brexit: What is priced in?

It’s impossible not to talk about Brexit this week and one of the questions we’ve received is: what is already priced in? Looking at GBPUSD and GBPEUR over the last month, we can see how much volatility currency markets are under. Last week, after one of the weekend’s polls showed an advantage to the Leave vote, GBP plummeted 1.8% against USD and EUR. This week, one new poll revealed an advantage to the Remain vote, and sterling rallied 2%, the largest movement in eight years. The truth, however, is that if we aggregate all recent polls, there is an exact tie, with 44% for both Leave and Remain.





Sterling’s implied volatility against both the US dollar and euro, which reflects the costs to buy GBP protection, are at its highest levels in 8 years, being only surpassed by the levels seen at the peak of 2008’s financial crisis. This pattern is...

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Brexit poses challenge for Central Bankers

After another weekend of new polls showing Brexit gaining in popularity, the split between the leave and remain camp is almost as tight as it has been since David Cameron announced the referendum on 20th February. Unsurprisingly, the pound has come under renewed pressure and the cost of protecting against a further depreciation in sterling (via the options market) has increased yet again.


Almost all market participants have become accustomed to the idea Britain leaving the EU will be negative for both sterling and risk assets in general. Economic uncertainty poses a significant challenge for the Bank of England in the months ahead and while nobody is expecting Mark Carney to announce a rate hike before the end of the year, there is a significant risk that the Central Bank may feel that additional monetary easing is required if Britain decides to leave. When the MPC meets on Thursday this week,...

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The Fed’s next move

Last Friday’s US jobs report shocked the markets with substantially weaker data than expected. Non-farm payrolls rose by a dismal 38,000 in May (well below the consensus forecast of 160,000). Furthermore, the previous two months’ readings were revised down by 59,000 and the number of people working part-time due to the lack of full-time jobs rose by 468,000. This is the slowest pace of hiring by US employers since September 2010.


Markets reacted by killing any expectations of a June (and even July) US rate hike. Implied market probabilities of a hike went down from 24% to only 4% in June, and from 53% to 27% in July after the report was released. The US dollar tumbled against a series of major currency counterparts, losing 2% against the EUR and JPY and 1.2% against the sterling (which was then reversed – more on this later).


The main question the Fed will need...

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