Pound volatil­ity be­fore EU sum­mit shows Brexit woes es­ca­lat­ing

The Pak Banker - - MARKETS/SPORTS -

UK law­mak­ers are not the only ones brac­ing for a tough few months be­fore Bri­tain's ref­er­en­dum on its Euro­pean Union mem­ber­ship. A gauge of ex­pected volatil­ity for the pound near the high­est since 2011 shows traders are ex­pect­ing a rough ride too.

Ster­ling dropped to the weak­est level in a year ver­sus the 19-mem­ber euro last week amid con­cern Bri­tish vot­ers will opt to exit the world's largest trad­ing bloc. U. K. Prime Min­is­ter David Cameron is seek­ing to reach a deal with EU lead­ers at a meet­ing in Brus­sels start- ing Feb. 18 that may al­low him to hold a vote as early as June.

"The 18-19 Fe­bru­ary EU sum­mit is widely per­ceived to be seen as the best op­por­tu­nity to strike a deal," Bar­clays Plc strate­gists in­clud­ing Sin­ga­pore-based An­gela Hsieh wrote in an e-mailed note. "We ex­pect a cor­rec­tion lower in EURGBP should an agree­ment be reached at the meet­ing, al­though an im­passe, to which we as­sign a non-neg­li­gi­ble prob­a­bil­ity, would likely weigh on the pound."

Six-month im­plied volatil­ity for the pound ver­sus the euro, a mea­sure of an­tic­i­pated price swings based on op­tions, climbed to 11.84 per­cent on Fri­day, the high­est clos­ing level since Oc­to­ber 2011. It was at 11.55 per­cent as of 9:51 a.m. in Lon­don on Mon­day. Ster­ling strength­ened 0.3 per­cent to 77.37 pence per euro af­ter drop­ping 0.9 per­cent last week. It de­pre­ci­ated to 78.98 on Feb. 11, the weak­est since De­cem­ber 2014. The pound was lit­tle changed at $1.4480.

U.K. govern­ment bonds fell for a se­cond day. The 10-year gilt yield climbed four ba­sis points, or 0.04 per­cent­age point, to 1.46 per­cent. The price of the 2 per­cent se­cu­rity due in Septem­ber 2025 de­clined 0.395, or 3.95 pounds per 1,000 pound face amount, to 104.83.

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