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The Sterling Roller Coaster

Posted by Joseph Trevisani on Jun 7, 2016 4:49:06 PM

Between its natural volatility, conflicting polls on the British exit from the European Union and a reported massive buy order, inadvertent or not, the sterling has had a wild few days. 

On Friday the U.S. payrolls report, far below expectations and crushing for the prospects of a Federal Reserve rate hike this summer, drove the sterling over 1 percent higher in the 45 minutes after the employment release.  

The following session on Monday a news  report that support for the referendum to leave the 28-member European Union had taken the lead dropped the pound 1.1 percent on  the Asian open to a point well below its lowest  level on Friday.

And this morning, near the London open, the pound jumped 1.2 percent in about one minute for undermined or unadmitted reasons. It could have been the simple execution of a large sterling buy order or perhaps a mistaken input of a much larger purchase than intended triggered automatic stop loss buying.

The pound ended the day around 1.4540, just about where it  closed on Friday.

Sterling has long been among the most volatile of currencies. Its expensive point value for dollar based traders and relatively low volumes encouraging quick turnover on positions.  These tendencies are likely to be exaggerated in the next two weeks leading up to the June 23rd referendum on U.K. membership in the European Union (EU).  

Monday’s plunge came as three polls showed more Britons favored leaving the EU than remaining. These results were followed later in the day by two other polls that showed a thin lead for the vote to remain.  

The vote for departure, or Brexit, has been gaining over the past several weeks and the pound has been falling with the fortunes of continued membership.

The sterling had reached a seven year low against the dollar in February at 1.3871 and is the worst performing major currency this year. 

With almost any new poll or political development capable of throwing the sterling market into a frenzy, traders will be more reluctant than ever to hold onto positions during the trading day.  

It is likely that banks, hedge fund, corporations and other large players will scale back involvement and risk, leaving the ever thinning standing order book unable to absorb the volumes generated by an event driven move. As liquidity wanes, the sterling market will be more and more prone to exaggerated movement from any given volume execution.  

Early in the run up to this vote, the market assumption was that the U.K. would choose to stay within the organization that it joined in 1973. But as the uncertainty of the outcome has grown and the risk of Britain leaving the union mounted, the likelihood of a chaotic session on the 23rd has risen dramatically.

No one knows how a British departure will play out. Trading desks around the world will be manned as the returns come in.  Institutions and traders are preparing for what could be, regardless of the outcome, a wild ride.

 

Joseph Trevisani

Chief Market Strategist

WorldWideMarkets Online Trading

Charts: Bloomberg

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