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GBP And U.K. Election: Asymmetric Sterling Reaction



  • Market-friendly outcome partly priced in, pointing to asymmetric GBP reaction.
  • Scenario analysis - initial GBP reaction over one to three days unlikely to be long-lasting, as Brexit is seen as a largely domestic event.
  • Corbyn's plans would likely see GBP hit hard should Labour enjoy a big win.

By Chris Turner, Global Head of Strategy and Petr Krpata, Chief EMEA FX and IR Strategist

GBP price action after the election will be asymmetric; 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. The asymmetry applies to spillovers into other G10 FX

Market-friendly outcome partly priced in...

Investors are awaiting the outcome of the UK general election (this Thursday), and the market is currently partly pricing a Conservative party victory. EUR/GBP is trading below 0.8500 (closing below this level for the first time since May 2017), and our short-term financial fair value model suggests a more than 2% positive Brexit resolution premium currently priced into GBP (Fig 1).The short GBP speculative position has been trimmed (currently 13% of open interest vs. close to 40% in mid-September - Fig. 2).

The EUR/GBP implied volatility term structure shows a heavily inverted curve, reflecting the anticipated two-way price action after the vote - either non-negligible appreciation or a meaningful depreciation. Indeed, EUR/GBP and GBP/USD breakevens point to a non-negligible and rather volatile post-election sterling reaction, at 140pips and 190pips, respectively.

Figure 1: GBP trading with positive Brexit resolution premium

(Source: ING)

... pointing to asymmetric GBP reaction

Given the anticipated market-friendly outcome, the GBP price action is likely to be asymmetric (skewed towards more meaningful sterling weakness vs. strength, as the non-market friendly outcome doesn’t appear to be investors’ base case). The theme of asymmetry is present in the scenario analysis in Figure 3 (larger GBP downside on a non-market friendly outcome vs. a less-pronounced upside on a market-friendly outcome). This is why the EUR/GBP implied volatility smile is skewed towards EUR/GBP calls (vs. puts), as evident in Figure 4.

(Source: ING, CFTC)

(Source: ING)

(Source: ING, Bloomberg)

(Source: ING)

(Source: ING, Bloomberg)

(Source: Bloomberg, ING)

This article was written by

From Trump to trade, FX to Brexit, ING’s global economists have it covered. Go to ING.com/THINK to stay a step ahead. We’re sorry we can’t reply to individuals' comments.Content disclaimer: The information in the publication is not an investment recommendation and it is not investment, legal or tax advice or an offer or solicitation to purchase or sell any financial instrument.This publication has been prepared by ING solely for information purposes without regard to any particular user's investment objectives, financial situation, or means. For our full disclaimer please click here.

Analyst’s Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

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