Britain’s impending referendum on whether it should stay in or leave the European Union is causing chaos in the country’s currency markets, sending the volatility of the British pound to its highest levels in more than seven years.
The CBOE British pound volatility index — which tracks the expected fluctuations of the currency over the coming month — currently stands at 21.76, the highest it has been since the tail end of the global financial crisis in February 2009.
To put that number in context, the pound is currently more than twice as volatile as it was at the beginning of May, and over 60% higher than in the lead-up to last year’s general election, when political uncertainty caused GBP volatility to spike.
Here’s the chart showing just how much the pound’s VIX has soared in the last week:
And here’s the chart that shows how much more volatile the pound is than in recent years:
The pound has been particularly sensitive to polling data in recent weeks, often moving as much as 1% — a substantial shift for any currency — when new data shows a change in voting intentions. On Tuesday, the pound spiked 0.9% lower against the dollar after a poll showed a big move towards the Leave campaign. On the other hand, on May 24, the pound surged after an ORB poll showed Remain pulling ahead.
If Britain does vote to leave the European Union, predictions about what could happen to the pound have been stark. The Bank of England expects a big fall in the currency, while Joe Rundle, the head of trading at ETX Capital says his firm is planning for “a 20% fall in Sterling and a 20% rise in dollar, so a 40% move” as soon as a vote for Brexit is confirmed.
As Business Insider reported last week, trading firms like ETX are trying to stop customers making risky trades in the run-up to June’s European Union membership referendum in a bid to ensure firms don’t go out of business if there are wild swings in the market following the result.
There have also been warnings that the UK leaving the European Union, as well as sending the pound massively lower, could bring into question Sterling’s status as a global reserve currency. Ratings agency Standard & Poor’s said in a note in May that a “UK departure from the EU could put sterling’s reserve status at risk by deterring foreign direct investment and other capital inflows into the UK.”
On Friday, the pound is relatively unmoved against the greenback, down just 0.07% to $1.4413. This lack of movement on the day is largely down to there being no new opinion polls expected on the day.
NOW WATCH: Money & Markets videos
Business Insider Emails & Alerts
Site highlights each day to your inbox.