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Britain decides To Be or Not To Be in EU
The big day has arrived. Britain votes for its future in the European Union today. Although the City of London was hit by a heavy thunderstorm last night, markets looked sensibly brighter during the trading session in Asia.

The pound traded to a fresh six-month high of 1.4844 against the US dollar. Light call options stand at 1.4700/1.4750 for today’s expiry. The EURGBP remained capped below the 0.77 mark.

Brexit referendum recap

The vote will be on until 10pm UK time. Early results should start creeping in by 2am Friday morning. We expect to have a clearer picture by 5am.

The market has been actively hedging against Brexit risks for the last three months. The ratio of put options against call options on British pound reached historical proportions; the pound-dollar lost 13.5% from June 2015 to March 2016, and the pair has been trading below the 50% retracement level of 1.4883 since last January. The implied volatility extracted from the option markets reached 28% last week, the realized volatility on pound-dollar spot market climbed to a seven year high.

Implied volatilities in the GBPUSD spot market suggests 25-30% probability for the UK to leave the EU. This is down from almost a 50% last week.

Moving forward, a ‘remain’ vote is expected to trigger an immediate relief rally in GBP crosses. The pound-dollar is seen climbing to the 1.50-1.55 range, while trend and momentum indicators remain comfortably negative in euro-pound for a potential extension toward the 200-day moving average, 0.7570.

In the alternative case scenario, a ‘Brexit’ vote should obviously trigger a kneejerk sell-off in the market. Despite a solidly hedged market, the majority of traders and investors did not price in the Brexit as a base case scenario. A Brexit event could be expected to drag the pound-dollar below the 1.40 level immediately and toward the 1.30 mark in the mid-term, and send the euro-pound up to 0.80-0.85 range.

The FTSE opened in the positive territory for the fourth consecutive session this week. All sectors opened in the green. Energy and miners are the frontrunners in London. Glencore (+2.89%), Royal Dutch Shell (+1.15%), Randgold (+1.33%), Antofagasta (+1.18%), Rio Tinto (+1.21%).

Despite the positive trend in the UK markets, the event risk remains high. The sentiment could rapidly turn sour should the slightest panic regarding the Brexit vote hit the headlines. Any sell-off could gain momentum as many investors would not hesitate to close their long positions and turn flat before the outcome of the historical Brexit referendum. Offers are eyed at 6300/6325 zone.

In case of ‘remain’ vote, we expect the FTSE to take off toward the 6500-6800 range, while a ‘Brexit’ vote could cause a sharp fall toward the 5800–5500 range.