While many market participants are skeptical about the outcome, recent opinion polls have indicated a lead for the ‘leave’ supporters, making investors nervous. As a result, the British pound dropped 0.7% to 1.4161, reaching a two-month low of 1.4117 on Monday.
As investors are preparing for a dive in the British pound, implied volatilities have surged, with one-month volatility posting a record level around 28% this week.
The cable fell 1.2% to 149.85 against the yen, as the yen tends to rise at times of reduced risk appetite. The yen is the strongest among G10 currencies so far in June and traded at 105.83 against the greenback, still close to Monday’s six-week peak of 105.73.
The Japanese Finance Minister warned against renewed appreciation of the yen on Tuesday, stating that he would ‘firmly respond’ if extreme moves continued in the currency markets. The risk of yen-selling intervention by Japan is lending support to the greenback against the yen.
The Bank of Japan's upcoming policy meeting on Thursday and Friday will drive the yen. Analysts expect that the Japanese central bank will hold off from any employing additional monetary easing measures.
The Bank of Japan will probably not take any actions, as the impact of any monetary easing at this point could be limiting while investors are preoccupied with the British referendum.
The Japanese yen hovered near a three-month high against the single currency, which slid 0.5% to 119.39. On Monday, the euro had reached a low of 119.005, the lowest level since February 2013.
The euro fell 0.1% to 1.1279 against the greenback, pulling away from Monday’s low of 1.1233.
The euro is also fragile to a Brexit risk that could injure the eurozone economy and seriously hurt European integration. At the same time, the euro could find support from safe-haven sentiment as the currency is used as a funding currency for trades in riskier assets.
Disappointing U.S. employment data released earlier this month affected expectations of a June/July rate hike by the Fed, lending support to the euro and other currencies against the greenback.
The U.S. Federal Reserve is holding a two-day meeting on Tuesday and Wednesday, with market watchers waiting for new signals about the timing of the next rate hike by the Fed.