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    Brexit can lead to sharp fall of cable, potentially towards the 1.26 area - Rabobank Sandeep Kanihama

    Jane Foley, Senior FX Strategist at Rabobank, notes that the relentless push higher in sterling volatility has continued, with 1m vol in cable now approximately 3 times higher than the average level for the past year and at higher levels than those recorded at the height of the financial crisis.Key Quotes“Since the start of the month cable has fallen over 4%. Although GBP/USD is still trading comfortably above its weakest levels of the year, the move lower has dismantled most of the recovery that the pound staged in April. Not all the downside pressure on the pound in recent months is the result of Brexit uncertainty.The pound was under heavy pressure in late 2015 and early 2015 on the back of weak domestic economic data which forced economists to push back their forecasts regarding the first BoE rate hike of the cycle. That said, in recent weeks the referendum has become increasing important for UK markets.On the event of a Brexit, we anticipate that cable will fall sharply, potentially towards the 1.26 area. We expect that GBP’s drop vs. the EUR will be less sharp but that EUR/GBP may still reach 0.86. We expect that EUR/USD will drop sharply towards 1.08 as the market starts to assess the impact of Brexit on broader levels of coherence and cohesion of the EU.A study published by US Think Tank Pew Research last week highlighted there is already significant opposition in key European countries to an ever closer EU. The Pew survey suggests that a median of just 51% across 10 EU countries surveyed have a favourable view of the European Union. Notably support for the EU is even lower in France than it is in the UK with 61% of French surveyed holding an unfavourable view compared with 48% of Britons.A Brexit or even a close vote in favour of ‘Remain’ on June 23 has the potential to further expose the dissatisfaction levels within the EU and increase the risk of political uncertainty across the region. This would undermine the EUR.”


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