Research Team at Nomura, suggests that with GBP/USD now trading at low levels, in a “no man’s land” of few historical barriers from here down to 1.35, the clear question is “how low can this go?”
“The answer seems simple to us: there is probably room for a short-term capitulation, as the last of the initial hedging flows go through, but we actually see a long-term opportunity here as bearish sentiment has likely reached peak.
As we expected, market sentiment for GBP deteriorated as the necessary hedging flows took place from Sunday evening onwards. FX implied vols headed higher and vol skew made new records in a move that was larger than what occurred in previous UK political uncertainty events such as the elections.
However, the Bremain camp currently has a 5-10% lead in the polls, where bookmakers have raised the odds since Monday to imply a lower 32% probability of Brexit. If the current pace of GBP’s fall were to continue we would have to assume we were heading for a Brexit, but it simply isn’t in our view. It will of course depend on polling trends and risk sentiment, but from these low levels GBP may present itself as a long-term value trade especially as the campaigning gets underway and the “Bremain” camp’s stronger argument starts to hold sway.”
(Market News Provided by FXstreet)