GBP/USD expected to be the most volatile currency pair on Brexit risks

Currency volatility GBP talking points

• GBP expected to be the most volatile currency (back on Brexit headline watch)
• IG client sentiment: GBP/USD may reverse higher

Top 10 most volatile currency pairs and how to trade them

GBP expected to be the most volatile currency (back on Brexit headline watch)

Across the G10 complex the pound is expected to be the most volatile currency with market participants on high alert for Brexit related headlines. UK Prime Minister Boris Johnson is due to meet with German Chancellor Angela Merkel on Wednesday, in which he is expected to reiterate that unless the European Union (EU) change the Brexit deal, the UK will leave the EU on 31 October without one. This will also be conveyed to French President Emanuel Macron on Thursday.

Ahead of Johnson’s meeting with Macron, a French official stated that given Johnson’s position on the Irish backstop, the baseline case is for a no-deal Brexit. As such, with neither side showing signs of offering a concession, no-deal Brexit risks continue to rise, which in turn has kept the pound on the backfoot. However, with that said, Tuesday provided a slight reminder as to just how bearish the market is, with reports noting that Merkel would think about a practical solution on the backstop sparking a 100 pip spike higher in GBP/USD before being faded.

Overnight implied volatility is up 0.200 vols to 8.625, this implies that GBP/USD ATM break-evens = 44 pips (meaning that option traders need to see a move of at least 49 pips in either direction in order to realise gains).

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IG client sentiment: GBP/USD may reverse higher

Retail trader data shows 73.8% of traders are net-long with the ratio of traders long to short at 2.82 to 1. In fact, traders have remained net-long since 6 May when GBP/USD traded near $1.29855, price has moved 6.6% lower since then. The number of traders net-long is 2% lower than yesterday and 6.7% lower from last week, while the number of traders net-short is 1.5% lower than yesterday and 6.8% higher from last week.

We typically take a contrarian view to crowd sentiment, and the fact traders are net-long suggests GBP/USD prices may continue to fall. Yet traders are less net-long than yesterday and compared with last week. Recent changes in sentiment warn that the current GBP/USD price trend may soon reverse higher despite the fact traders remain net-long.