Knightian uncertainty is named after University of Chicago economist Frank Knight (1885–1972), who distinguished risk and uncertainty in his work Risk, Uncertainty, and Profit:

“Uncertainty must be taken in a sense radically distinct from the familiar notion of Risk, from which it has never been properly separated…. The essential fact is that ‘risk’ means in some cases a quantity susceptible of measurement, while at other times it is something distinctly not of this character; and there are far-reaching and crucial differences in the bearings of the phenomena depending on which of the two is really present and operating…. It will appear that a measurable uncertainty, or ‘risk’ proper, as we shall use the term, is so far different from an unmeasurable one that it is not in effect an uncertainty at all.”

The concept of a separation between risk and uncertainty is an important one right now given how severely politics are driving markets. Maybe for another analyst, politics is a measurable field and subject to probabilistic analysis. For me, it is just pure uncertainty.

But, this uncertainty is driving the market, so I have to at least attempt to measure it and identify relevant relationships. The one area where there seems to be some interesting relationship is in the currency markets. In the chart below, I illustrate how greater global uncertainty is associated with a stronger USD. If one is looking for another surge higher in the USD, this chart provides the ammunition as global economic policy uncertainty is breaking out to new highs.

Turning to Europe, there is a really strong relationship between the Bloomberg Brexit Barometer and the GBP/USD cross. If the odds of Brexit continue to rise, history would suggest a weaker GBP is likely.