Good morning,

GBP and Brussels

Events in Brussels continue to cast a very large shadow over everything this morning. Traders were looking for an excuse to not trade in what were already rather thin markets, and the news coverage from Belgium did a fair bit of the work for them.

GBP was the main laggard throughout the day and it is difficult to not see the price action of the pound as a direct result of fears that something similar may happen on the streets of London, Manchester or Birmingham if the UK doesn’t leave the EU.

Odds at a few online bookies shifted yesterday to represent this; according to Betfair there is now a 36% chance of a vote to Leave on June 23rd compared to a 32% chance 24hrs earlier. An online poll released last night showed a lead for the Brexiteers of 2%. We have not had a phone poll that has used the strict question that will be put to voters for a month now, but all indications are showing a tightening of the polls as we get closer to the vote.

All of these probabilities back up the market belief that should we vote to remain then GBPUSD will likely improve back towards 1.50 but fall towards 1.20 in the event of a vote to Brexit.

Rates and vol having a say too

Yesterday’s lower than expected CPI number from the UK hardly helped matters, coming in at 0.3% on the year versus an expectation of 0.4%. For now, the Bank of England will take this number in its stride; they have been unwilling to look through inflation levels only a jot lower than this, yesterday’s number is not going to change that. They have a referendum to be worried about.

Volatility markets have been worried about the referendum for a while. As today marks three months until the vote the benchmark 3 month volatility contract on all sterling pairs has picked up this morning. Hedging referendum risk via options just got even more expensive.

The Day Ahead

Elsewhere, currency ranges that have been in operation for a couple of weeks now are still giving pairs either gravity or levity depending on how you look at them.

The data calendar is as dead as the proverbial dodo today with little structured news from global markets. We will receive speeches from Bundesbank Chairman Jens Weidmann and Fed member Bullard.

Have a great day.

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