By Vassilis Karamanis, an FX and rates strategist who writes for Bloomberg.
Brexit Ructions May Mean Sustained Pound Volatility: Macro View
This week’s spike in the volatility of the British pound could prove longer-lasting than the bouts of instability seen so far in 2017.
One-month implied volatility for GBP/USD is on course for the biggest weekly gain since January after Conservative Party lawmakers were seen willing to challenge May’s leadership and talk of a 60 billion-euro Brexit bill resurfaced.
On Wednesday, demand for low-delta options hit a three-month high. EU officials were said to be bracing for failure as both sides seek a breakthrough in negotiations before a crunch meeting next month.
The jump in pound swings is nothing new, though previous episodes were neither prolonged nor sustained. Traders tend to respond in a late fashion to political risks, and adverse market outcomes have been avoided in the end. Volatility has actually been in a steady downtrend since January, as forward guidance by the central bank made sure investors faced as few surprises as possible.
This time, however, BOE Governor Carney has stressed the importance of the divorce talks to monetary policy. And the turmoil in Westminster means the current impasse in negotiations may continue into 2018, making sure sterling remains very sensitive to Brexit headlines.
Investors may need to keep rolling over their long-volatility positions to stay hedged if a no-deal outcome is back in the cards.