The UK's EU in/out referendum set to be held on 23 June represents a big event risk for GBP.
The main risk for sterling is associated with the UK's large current account deficit and its negative net international investment position (NIIP).
A significant Brexit risk premium has already been priced into the FX market: implied volatility and option skews are at extreme levels while a risk premium of around 3.5pp has been priced into the EUR/GBP spot rate according to our calculations.
We see risks skewed on the upside for EUR/GBP in the coming months going into the referendum, and we think the recent decline in EUR/GBP has created a window of opportunity to establish GBP hedges.
In our view, EUR-based clients should maintain a high short-term FX hedge ratio on GBP risks.
Given the large 'digital risk', we generally recommend hedging GBP exposure via options.
We think that a boosted risk reversal strategy is currently the best way to hedge GBP income.
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