Expected Impact of Brexit on Currency Markets

This short post is inspired by some friends asking whether they should cash in their euros stash ahead of the Brexit result  today.  As a finance academic and a former currency market participant I think the best answer here is to ask

“what do the currency markets think ?”

More specifically, what is the expected impact of Brexit on the chunnel rate (the EUR/GBP currency pair) according to the FX option markets.  We can use expectation theory to provide us with an estimate of the impact based on the probability of Brexit  and the expected % change in the chunnel rate for either scenario.  Mathematically:

Bloomberg has some excellent estimates to fill in the blanks on the right-hand side of the above equation.  Specifically, they have used the EUR/GBP and USD/GBP FX options markets to produced both an implied probability of Brexit and its  % impact on EUR/GBP rate.  Table 1 shows these estimates averaged for the last 30 days1.  I have also included the implied probabilities of Brexit from a number of other sources as a comparison.

Source of ProbabilitiesProbability Brexit Probability Remain Expected Move in EUR/GBP | Brexit Expected Move in EUR/GBP | RemainExpect Impact of Brexit
Number Cruncher37.0262.986.82-6.82-1.77
BBG FX Options20.2979.716.82-6.82-4.16
Bing Predicts41.558.56.82-6.82-1.16
All numbers are in percentages. I have made the assumption that there is a symmetrical impact between for the EUR/GBP rate. Columns 2-5 are 30 day averages.


From the last column in Table 1 in all scenarios the expected impact is negative for my mate’s stash of Euro.  In conclusion, cash in the stash before they are devalued!


Clearly my symmetrical assumption on Brexit impact was misguided and if I had considered my other post, this lack of symmetry would be obvious.  If i had assumed a no change assumption for a remain vote the calculations would have looked much different:

Source of ProbabilitiesProbability Brexit (%)Probability Remain (%)Expected Move in EUR/GBP | BrexitExpected Move in EUR/GBP | RemainExpect Impact of Brexit
Number Cruncher37.0262.986.820.002.53
BBG FX Options19.4980.516.820.001.33
Bing Predicts41.5058.506.820.002.83
  1. Figure 1 and Figure 2 are time series graphs of underlying indices that these averages are based on:

    Figure 1: BRXBEUR Index (Bloomberg Expected Move in EUR/GBP in the Event of BREXIT)

    BRXBEUR Index (Bloomberg Expecte 2016-06-23 12-58-06

    Figure 2: BRXBLEAV Index (Bloomberg Probability of  BREXIT from the FX Options Markets)

    BRXBLEAV Index (Bloomberg Probab 2016-06-23 12-59-20