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GBP Braced for Election Volatility

Volatility Expected

Traders are waiting patiently for the first exit poll results to trickle in to gauge market sentiment. The last couple of days there has been an increasing divergence in opinion as the ComRes tracker had Tories on 41% and Labour on 36%, whilst Kantar has Tories 12 points ahead. There is broad agreement from all polling trackers that Tories do command a lead, however the size of that lead varies greatly.

Considering that some seats are ‘marginal’ and a swing in either direction could be pivotal in deciding whether we have a Tory Majority or a hung parliament, the only certain factor in this election is uncertainty.
The FT has also cast doubt on likelihood of a Tory majority

The base case forecast amongst most Banks and analysts is for a Tory majority and the significant improvement in GBP against USD & EUR reflects that this scenario has been fully priced in.

That being said market participants have not forgotten the shock Brexit referendum result and the erosion of Tory support in 2017 leading to an acute depreciation for GBP. This vivid memory has led to the options market being particularly active with ‘Put Options’ being purchased to protect against any adverse GBP movements

 

Put options give owners the right, but not the obligation, to sell a specified amount of an underlying security at a specified price within a specified timeframe.

ING Economists also report that risks for GBP remains asymmetric, meaning they expect,

less pronounced gains on a market-friendly outcome vs more meaningful losses on a non-market friendly outcome. A Conservative party majority should send EUR/GBP to 0.82/0.83 within a day. A hung parliament should lead to EUR/GBP spiking to 0.87

 

ING appear justified in their expectation for wild swings as implied volatility which is a measure of how much insurance traders are seeking has jumped to the highest level since the monumental 2016 Brexit Referendum.

Our dealing team at RIF FX remain on hand throughout the election period if you have any urgent hedging requirements or simply wish to discuss possible scenarios in more detail

You can reach us on 0207 183 833 / trading@riffx.co.uk


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