Ahead of the UK’s referendum on continued EU membership, the possibility of a Brexit is dominating sentiment surrounding the pound. The FX market is arguably one of the most responsive to economic affairs and as such, monthly IN_GBPUSD volatility in the first quarter of 2016 has been notably higher than in the second half of 2015. Further strong moves are expected in the lead up to the referendum.
Looking at the monthly IN_GBPUSD chart, it is clear that by historical standards the pair is seriously cheap. Over the past 30 years, GBP/USD has never been lower than its January 2009 low of $1.3504. Typically, cable bottoms within the $1.4230-$1.3504 zone rather than at any single reliable level. The early 2016 sell-off did move into this zone, falling to the approximate middle before rallying sharply higher since.
With polls indicating growing support for the ‘remain’ campaign, traders will see these levels as straight out of the bargain basement. Considering the UK is moving towards a tightening monetary policy stance, sterling is highly likely to be significantly higher in four months’ time should the UK remain within the EU.
Of course there is the possibility of another leg lower for the pair, but $1.3504 is a likely backstop to any such move. To the upside, the key resistance levels to watch out for are $1.4566 and $1.5930.