The pound may be in for a rough ride as contrasting headlines surrounding the fate of Brexit test traders’ nerves.
Sterling whipsawed between gains and losses multiple times on Tuesday as investors adjusted their positions to news about the UK’s impending exit from the European Union. The currency tumbled from a six-week high after a report the EU sees the UK as too optimistic, then pared some losses after Ireland’s Prime Minister Leo Varadkar said a deal could be done in weeks. Gauges of swings in the currency climbed to a six-month high.
“There is more upside to volatility,” said Ned Rumpeltin, European head of currency research at Toronto-Dominion Bank. “We’ve probably seen sterling volatility bottoming out for the year. The markets would perhaps like to focus on the more mundane stuff, like the economy, but headlines bring Brexit back to the forefront.”
One-month implied volatility in sterling versus the dollar jumped to its highest since March at 9.22 percent. A similar surge was seen across tenors in the options market, with the three-month measure — which would cover EU summits into December — at the highest since February.
The pound traded down 0.2 percent at $1.2998 in London. The currency jumped above $1.30 on Monday after the EU’s chief negotiator Michel Barnier said a deal was realistic by November.
The Brexit news is likely to keep flowing. A pro-Brexit group of lawmakers led by Jacob Rees-Mogg will present their own plan on Wednesday for solving the Irish border, an issue seen as a key obstacle to a deal.
Then comes the Bank of England’s rates announcement on Thursday, with the policy outlook hinging on the outcome of Brexit. If the UK crashes out of the bloc without a deal, it would lead to another drop in the pound, Governor Mark Carney said this month.
“We could get more headlines as we’re getting closer to the mid-October deadline and that’s a recipe for volatility,” said Adam Cole, chief currency strategist at RBC Europe.