Pound Tumbles as Volatility Escalates With Brexit Vote Looming

Will Recession Come With a Brexit Vote?
  • Currency heads for second weekly decline versus dollar
  • Sterling is 2016’s worst-performing Group-of-10 currency

The pound dropped and trader expectations for price swings climbed to a fresh seven-year high as anxiety about a potential British exit from the European Union gripped investors.

Brexit Watch: The pound, the polls, and the probability of Brexit, all in one place

The currency slid to the lowest level since April with less than two weeks to go before the U.K. decides on whether to remain in the world’s biggest single market. A gauge of one-month volatility, which goes beyond the June 23 referendum to encompass the aftermath of the vote, climbed for a sixth week, indicating traders are girding themselves for more turmoil after the referendum is over.

Sterling dropped 1.4 percent to $1.4253 as of 2:01 p.m. New York time, after touching $1.4181, the lowest since April. The currency extended losses after the latest U.K. poll conducted for Orb/Independent showed 55 percent leave, 45 percent remain.

“The day of the vote and results is not likely to be the end of the volatility,” said John Goldie, a senior dealer at Argentex LLP, a currency advisory company in London. “Regardless of outcome, there will likely be a sharp move in rates followed by a period where markets are finding their new normal. The volatility won’t disappear overnight.”

The pound has had a tumultuous week, dropping as much as 1.1 percent on June 6 after polls signaled a lead for voters who support leaving the 28-nation bloc. It climbed as much as 1.5 percent the following day as later polls suggested more support for the ‘Remain’ camp and amid speculation a mistyped transaction had triggered automatic orders to avoid losses.

Brexit Risk

The risk of a so-called Brexit is prompting speculation that major central banks are delaying policy changes until after the June 23 vote -- either to avoid tightening prematurely, in the case of the Federal Reserve, or to keep stimulus available should it be needed later, as with the European Central Bank. Fed Chair Janet Yellen warned this week a Brexit would have “significant economic repercussions,” a concern echoed by counterparts including Reserve Bank of India Governor Raghuram Rajan.

“Volatility staying high means it’s not just Brexit itself but the fallout from the vote that markets are looking at,” said Masashi Murata, a vice president at Brown Brothers Harriman & Co. in Tokyo. “The ECB will likely pump in cash if there is a Brexit.”

Implied volatility for one-month options on the pound versus the dollar rose to 23.59 percent and earlier reached 23.7 percent. That’s highest since January 2009, and more than double the level at the end of April. The measure of anticipated price swings has climbed every week since the period ended April 29, the longest streak of increases since February. A gauge of two-week volatility climbed to the highest on record.

Worst Performer

The pound has been a gauge of sentiment throughout the referendum debate. It slid to a seven-year low of $1.3836 in February, and remains the worst-performing Group-of-10 currency this year.

A measure of three-month pound-dollar volatility climbed to 15.82 percent. It reached 16.40 percent in April, the highest since 2010.

Volatility beyond the referendum is still high as traders assume “that a Brexit vote would not just bring a very short-term shock but ongoing weakness,” said Steven Barrow, head of G-10 strategy at Standard Bank Group Ltd. in London. “While, if ‘Remain’ wins, if there’s lots of Brexit hedging to unwind, sterling might not just ratchet higher but continue to rise for weeks, possibly months, as the hedges come off.”

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