Pound volatility soars with eyes on Brexit woes
Overnight volatility in sterling against dollar climbed to highest level in more than a year
Volatility in the pound jumped as traders looked ahead to the next hurdle on the Brexit path even if a draft deal is signed off by Prime Minister Theresa May’s senior ministers.
Overnight volatility in the pound against the dollar climbed to the highest level in more than a year. One-, twoand three-month measures also rose, suggesting that uncertainty will still linger even if May’s Cabinet agrees to sign off on the Brexit deal struck with the European Union. Sterling gained 1 per cent versus the US currency Tuesday as the United Kingdom and the EU agreed on a draft text, including the Irish border backstop clause.
“Following months of intense negotiations, the UK and EU negotiators have agreed on a text for a Brexit deal that would address the thorniest issue of all — the question about a postBrexit Irish border,” Credit Agricole SA strategists including Valentin Marinov wrote in a research note. Still, “some uncertainty will likely linger before and after today’s Cabinet meeting and this may cap investors’ appetite for the pound.”
Sterling fell 0.2 per cent to $1.2957 as of 10:33am in London. It was little changed at 86.98 pence per euro, after touching 86.56 pence Tuesday, its strongest level since April.
Implied volatility, a measure of price swings, on the overnight tenor in pound-dollar climbed to almost 25 per cent to touch the highest level since June 2017 on the risk that May’s Cabinet doesn’t back her plans.
Some strategists said the market will likely have to wait for the Parliament vote for a significant rally in the pound, though Nomura International Plc strategist Jordan Rochester forecast sterling may rise as much as 2 per cent to $1.3250 if the Cabinet is convinced of May’s deal.