The GBP came off sharply as investors started re-assessing the risk of Brexit after several prominent conservatives voiced their support for Britain leaving the EU in recent days. The GBP-volatility could escalate more if we see further evidence that the support for Brexit is growing in the polls. Indeed, while our central scenario is still for Brexit to be avoided, we recognize that the risk of an ‘accidental’ Bexit have increased of late. We therefore advise staying cautious on GBP in the near-term.
The growing GBP-volatility is seemingly having a negative impact on EUR with the single currency coming under renewed selling pressure recently. We suspect that investors fear that a potential Brexit could add to concerns that other EU member states may follow the UK. Such fears could linger especially if the migrant crisis escalates further and the EU economic recovery remains lacklustre. In turn, growing political risks could add to the macroeconomic headwinds in the Eurozone as it could delay business investment decisions and dampen hiring intentions. All that should keep the ECB aggressively easing from here, weighing on EUR.
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