Pound volatility before EU summit shows Brexit woes escalating
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.