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Brexit spooks currency traders

Market Watch
Fears over Britain leaving the EU have resulted in a spike in options protecting against a falling pound
At the time of publication, Prime Minister David Cameron is locked in talks to win reforms for the UK in the EU. Success on his part would strengthen the 'in' campaign

Fears over Britain leaving the EU have resulted in a spike in options protecting against a falling pound

As the UK’s referendum on European Union membership edges closer, currency traders are growing fearful of the effect its outcome will have on the value of sterling. Traders are increasingly buying contracts to protect against swings in the pound on forex markets in the summer.

The cost of options on the pound has hit its highest level since the Eurozone debt crisis shook Europe. Euro-sterling six-month options have seen their implied volatility – an expression of the expected divergence of exchange rate movements during the lifetime of an option – rocket. It is now at its highest level since 2011, at over 12 percent – an increase of nearly four percent since December.

The implied volatility of euro-sterling six-month options is now at its highest level since 2011

Traders and investors are opting for these options out of fear that the referendum will see the GBP fall on currency markets. Uncertainty over the outcome of the referendum has already resulted in a slight slide on the value of sterling in 2016. It is not necessarily a split between the UK and EU that has currency traders fearful, but rather the potential drawn out messiness of the UK’s succession. If the UK were to withdraw from the supranational union, there are fears the EU may punish it economically.

The outcome of the referendum is still unclear, with the electorate roughly split half and half. Prime Minister David Cameron hopes to reach a deal with the EU concerning the terms of UK membership, which may shore up support for the ‘in’ camp. The vote is expected to take place later this year.

 

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