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As Brexit Fears Run Higher, Don't Forget About FOMC Tomorrow

As Brexit Fears Run Higher, Don't Forget About FOMC Tomorrow

2016-06-14 12:04:00
Christopher Vecchio, CFA, Senior Strategist

Talking Points:

- GBP/USD implied vol now at highest level since October 2008.

- FOMC meeting overshadowed as no rate hike is anticipated.

- FX volatility set to remain high with FOMC and Brexit vote next two weeks - it's the right time to review risk management principles to protect your capital.

Everyone and their mother is talking about the UK-EU referendum next Thursday, June 23. There is good reason, too: GBP/USD two-week annualized implied volatility is now pricing in the greatest risk in the market since October 2008 - the height of the GFC. The volatility that was seen around the Scottish referendum in September 2014? Small ball compared to what we're seeing in the run up to the June 23 vote.

Let's take a step back, though. There's plenty to worry about before June 23, mainly, tomorrow's FOMC meeting! Market participants seem unconcerned - complacent, even - about tomorrow's rate decision. This is the wrong mindset. Even though Fed funds futures contract implied probabilities have plummeted to 0% chance of a hike in June, and below 50% for December, that doesn't mean forward guidance won't play a part. Indeed, with no rate hike being priced in through February 2017, anything that's a blush too hawkish could easily emerge as a bullish US Dollar catalyst; rate expectations, being so depressed, could reflexively serve as a tailwind (which wouldn't be good for risk).

With all the attention on the Brexit, the central bank meetings this week have seemed to take a back seat. This makes sense, though. If the Fed hikes, and there is a Brexit? The Fed will have to backtrack, which will cost them credibility. If the BOJ eases, and there is a Brexit? The BOJ would likely see its intervention efforts negated almost immediately. Thus, it makes very little sense for any central bank to do anything before the June 23 vote - they need to save their ammo in case markets slip heading into the second half of the year.

See the video (above) for technical considerations in EUR/USD, GBP/USD, USD/JPY, AUD/USD, GBP/JPY, and the USDOLLAR Index.

Read more: GBP/USD Dives as Brexit Fears Spread to Global Equities

--- Written by Christopher Vecchio, Currency Strategist

To contact Christopher Vecchio, e-mail cvecchio@dailyfx.com

Follow him on Twitter at @CVecchioFX

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