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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-, two- and three-month measures also rose, suggesting that uncertainty will still linger even if May’s Cabinet agrees to sign off later Wednesday on the Brexit deal struck with the European Union. Sterling gained 1 per cent versus the US currency Tuesday as the United Kingdowm 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 with thorniest issues of all — the question about a post-Brexit 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.”
Brexit divorce deal text agreed by EU and UK, May's ministers to meet
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Dollar hits 16-month high; Brexit fears knock sterling
Sterling had fallen 0.2 per cent to $1.2957 (Dh4.75) 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. The Cabinet meeting is due to take place at 2pm in London Wednesday.
Short-dated options were also supported as traders turned their attention to a Parliament vote on the Brexit deal that could come within weeks, which could boost the odds of no deal and even lead to a general election.
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 later on Wednesday.
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