BOE Warns of Volatile GBP Ahead of Brexit Referendum

The governor of the Bank of England has said currency traders are buying more protection against the pound falling now that the referendum on membership of the EU has been announced.

Speaking at the Treasury select committee, Mark Carney said the central bank was not seeking to predict the outcome of the referendum, which takes place on 23 June, or the impact of a vote to leave. But he said it was watching for the potential impact of fluctuations in the value of sterling on economic activity.

“There have been movements in sterling since it’s been increasingly clear, and now clear, [about] the timing of the referendum. Particularly, there has been a sharp increase in risk reversals – buying more downside protection against future falls in sterling around the referendum date as opposed to upside protection,” Carney said.

“They have spiked to levels consistent with around the height of the Scottish referendum,” the Bank governor added, noting that they have been “particularly concentrated” in the sterling/dollar options market.

Carney said if uncertainty over the referendum started to affect confidence in the economy, the BoE’s rate setters would expect that to show up in surveys conducted by its agents across the country.

He said the BoE was making contingency plans and that its Prudential Regulation Authority division was keeping a check on banks’ planning for the vote.

Gertjan Vlieghe, who sits alongside Carney on the bank’s monetary policy committee, told MPs sterling’s fall could affect confidence among consumers and companies. Normally a fall in the pound would be good for the economy but that may not be the case because of the referendum, he said.

via The Guardian

Alfonso Esparza

Alfonso Esparza

Senior Currency Analyst at Market Pulse
Alfonso Esparza specializes in macro forex strategies for North American and major currency pairs. Upon joining OANDA in 2007, he established the MarketPulseFX blog and he has since written extensively about central banks and global economic and political trends. Alfonso has also worked as a professional currency trader focused on North America and emerging markets. He holds a finance degree from the Monterrey Institute of Technology and Higher Education (ITESM) and an MBA with a specialization on financial engineering and marketing from the University of Toronto.
Alfonso Esparza