Pound just snapped back from critical low against Dollar today around 1.406 area but price actions clearly suggests vulnerabilities remain. Over the past five days, Pound has dropped more than 400 pips against Dollar.

Fear of Brexit has been key driver behind the drop. Recent rift among Prime David Cameron’s own party regarding budget and terrorist attack in Brussels, both are expected to strengthen exit camp and lead to people leaning towards exit.

However Pound’s movement in the spot market is much smaller and less stirring, when compared to the shift in options market.

• Pound/Dollar implied volatility has risen for eight consecutive days, while Pound has dropped only in five of them.

• As of now, 3 month IV is trading at 15.2%, which is highest level in six years. IV touched 16.9% in May 2010, when Prime Minister Cameron was suffering coalition issues post-election.

• Yesterday, 3 month IV jumped by 2.6%, which is biggest move since 2008 financial crisis.

• Demand for puts are so high that yesterday, puts were trading at 4.2% premium to calls. Yesterday it jumped from 2% around.

Pound is likely to test lows around 1.38 area and might even break below if 1.406 fails to provide support.