Pound volatility soars as traders look ahead to next Brexit hurdle

Bloomberg

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 on the Brexit deal struck with the European Union. Sterling gained 1 percent versus the US currency as the UK 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 Wednesday’s cabinet meeting and this may cap investors’ appetite for the pound.”
Sterling fell 0.2 percent to $1.2957 in London. It was little changed at 86.98 pence per euro, after touching 86.56 pence on Tuesday. Implied volatility, a measure of price swings, on the overnight tenor in pound-dollar climbed to almost 25 percent to touch the highest level since June 2017 on the risk that May’s Cabinet doesn’t back her plans. The Cabinet meeting was expected to take place in London on 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 percent to $1.3250 if the Cabinet is convinced of May’s deal on Wednesday.