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Brexit "Remain" Assumptions Can Create More Pound/Market Risk

Brexit "Remain" Assumptions Can Create More Pound/Market Risk

John Kicklighter,

Talking Points:

  • The June 23rd EU Referendum is not just a UK risk - it carries serious implications for the EZ and World markets
  • A recent shift in opinion polls to support the 'Remain' vote does support the more 'stable' outcome
  • However, the more surprising a realized Brexit vote is, the more explosive the repricing risk

See how retail traders are positioning in the majors using the SSI readings on DailyFX's sentiment page.

A swing in opinion polls surrounding the upcoming Brexit vote to support a 'Remain' outcome may seem an encouraging development. Status quo would suggest stability for the UK economy, Euro-area financial system and global risk trends. However, this 'favorable' swing for the markets brings is own issue: greater complacency. If the outcome looks to be the one oriented towards market stability, investors are less motivated to balance their risk exposure - from direct Pound-oriented positions to more far-afield risks. From that neutral setting, a vote for Brexit (the UK to leave the European Union) would be more shocking and trigger a larger wave of repositioning.

The moderation in healthy fear levels can be seen not just in the remarkable Pound rally which carried GBP/USD from 1.4100 to 1.4700 in less than three days, but also in implied volatility. Expected volatility over the coming week for the Cable is still extremely high at 39 percent, but it is still significantly reduced from Friday's high of 48 percent. We see similar ease in fear through volatility measures across the financial markets from FX to currencies to government bond yields.

It isn't difficult to divine the source of this flip in sentiment. The weekend opinion polls shifted swung back in favor of the 'Remain' camp in direct contrast to the previous weekend when the drama hit a frenzied level when numbers oscillated to 'Leave'. The historical balance in these polls have been remarkable tight over the weekend. It is likely that we see another flip before the actual vote begins. While there is a substantial risk of volatility and reaction to either outcome, the more dramatic and systemic surprise would come a Brexit that was underpriced. We discuss this leveraged risk in today's Strategy Video.

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DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.