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Spurred by the Brexit, the Pound’s Implied Volatility Is Rising

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Apr. 15 2016, Updated 4:11 p.m. ET

Rising trend in implied volatility for the British pound

Implied volatility has seen a much larger rise in the pound-dollar currency pair compared to the euro-dollar pair. The primary driver of the pair’s increase in volatility has been the upcoming Brexit vote for a possible exit of the United Kingdom from the European Union (or EU).

The move could lead to major challenges on the trade front. It could also cause a shift in the economic reliance maintained between the two regions. Over a period of 30 days, the implied volatility in the pound-dollar exchange rate has risen by almost 2%.

Looking at a broader 90-day range, the rise in the pound-dollar exchange rate volatility has been a strong 26% compared to a fall of 10.5% in the euro-dollar exchange rate volatility. The divergence has been heading for a steady rise since the beginning of this year on the back of Brexit woes.

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Upcoming economic events will affect volatility

The UK referendum vote on June 23, 2016, will be a primary driver affecting the volatility in the pound-dollar rate. The Bank of England (BoE) has been keeping its monetary policy steady, with interest rates fixed at 0.5%.

Optimism regarding a hike in the benchmark rates by the BoE has taken a hit due to the upcoming referendum vote, which will play a factor in deciding estimates for GDP growth going forward.

The International Monetary Fund has highlighted the risk of exit from the European Union, leading to a surge in volatility for the British pound.

Impact on important ETFs

Looking at the performance of major ETFs, the iShares MSCI United Kingdom ETF (EWU) has fallen by 3.7% in the last month, while the iShares Europe ETF (IEV) has risen by 2.7%.

Looking at the performances of banking American depositary receipts in the past month, Barclays (BCS) has risen by 1.4%, and HSBC Holdings (HSBC) has fallen by 1.2%. Royal Bank of Scotland Group (RBS), on the other hand, is at the same level comparatively, despite increased volatility during the month.

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