GBP Relief Rally Starts Early – Perhaps Too Early?

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Market Drivers June 23, 2016

UK Voting begins
High yielders rally
Nikkei 0.48% Dax 1.70%
Oil $50/bbl
Gold $1269/oz.

Europe and Asia:
EUR EZ Flash PMI Man 52.6 vs. 51.4
EUR EZ Flash PMI Svc 52.4 vs. 53.2

North America:
USD Weekly Jobless 8:30 NY
USD New Home Sales 10:00 NY

UK voters had barely lined up to vote the referendum but the relief rally had already started in the currency market as traders tried to get ahead of the results by bidding up GBP/USD and high yield pairs.

Cable raced to a fresh multi month high hitting 1.4940 in morning London dealing as markets bet big that the Remain vote would win. The latest poll from Ipsos showed remain at 52% versus 48% for leave but the margin of error still remains too close to call and many extraneous factors could still affect the outcome.

One of those factors is the weather which appears to be horrid through much of the United Kingdom as rains continue to pour. The unknown question is whether the adverse weather could keep some of the undecided voters away. The Leave side certainly carried much greater emotional punch and its supporters appear to be far more motivated than the Remain campaign.

The general prediction models always err on the side of caution believing that in advanced democracies the default vote is always for no change. That is why the bookie odds were so far ahead of the polls with the latest Betfair book showing only a 26% implied probability for Leave to succeed. But with polls showing a clearly divided populace the situation remains fluid and markets could turn on a dime if news begins to leak out that Leave vote is close.

As of now GBP/USD has become a highly asymmetrical bet with most of the upside already factored into the trade. Therefore if Remain does win the cable rally is likely to peter out at the 1.5000 level. However if Leave begins to pull ahead the pair could slide as much as 1000 points in a matter of minutes.

Boris Schlossberg
Managing Director

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