Why Pound Volatility Is Here To Stay

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.

Comments

vegas Thu, 11/16/2017 - 06:31 Permalink

Dear Vas; You and your buds in the analyst camp have been consistently wrong on rates in the U.K. for over 10 fucking years now ... that's 120 months of talking about rate rises that never come. Now, however, you got your finger on the pulse of some Brit Apparatchik hacks, who now use "Brexit" at every opportunity to cover for more wrong analysis. More volatility? Where? Look at a daily GBPUSD chart, and outside of days when the Brit Pie Holes can't shut up, there isn't any volatility. www.traderzoogold.blogspot.com

BritBob Thu, 11/16/2017 - 06:34 Permalink

German media has obtained a European Parliament report suggesting a ‘No Deal’ scenario after Brexit would leave a €10.2-billion hole in the European Union’s annual budget.This would leave Germany, traditionally viewed as the engine of the bloc, having to make up much of the difference, with a rise in its annual contributions of 16 per cent — or roughly €3.8 billion — to maintain spending at current levels (Handelsblatt Global) 

buzzsaw99 Thu, 11/16/2017 - 07:01 Permalink

poor brits, pushed around by their own gubbermint.  spied on, lied to, oppressed by shitty ridiculous laws, taxed, beaten into submission, jobs shipped out, terrorist muzzies shipped in...  along comes the eu to do more of the same, the usa loves to push people around too.  no small wonder guys like britbob are so beleaguered with the weight of the whole world on their shoulders.  if they weren't so pugnacious i'd almost feel sorry for them. 

John C Durham Thu, 11/16/2017 - 10:58 Permalink

Yes, the pound is already "mostly downward". This is natural as The City of London's "Bank of England" day of reckoning of Gold ownership and the Gold Yuan International Trade Note, together approach a current moment.