Brexit 'Absolutely Defining Issue' for Sterling, Citi's Rahbari Says
Volatility in the pound jumped as traders looked ahead to the next hurdles on the path toward a Brexit deal.
Overnight volatility in the pound against the dollar climbed to the highest level in more than a year as Prime Minister Theresa May’s Cabinet meets Wednesday to decide on a draft Brexit deal struck with the European Union. One-, two- and three-month measures of price swings also rose, suggesting investors expect uncertainty to continue.
“Following months of intense negotiations, the U.K. and EU negotiators have agreed on a text for a Brexit deal that would address the thorniest issues of all -- the question about a post-Brexit Irish border,” Credit Agricole SA strategists including Valentin Marinov wrote in a research note. “Some uncertainty will likely linger before and after today’s Cabinet meeting and this may cap investors’ appetite for the pound.”
Sterling slipped to US$1.2936 as of 2:16 p.m. in London, after swinging between a gain to US$1.3036 and a drop to US$1.2886. Sterling jumped 1 per cent versus the dollar Tuesday after the U.K. and the EU agreed on the draft text.
Implied volatility, a measure of price swings, on the overnight tenor in pound-dollar climbed to almost 25 per cent earlier Wednesday, touching the highest level since June 2017 on the risk that May’s Cabinet doesn’t back her plans. The Cabinet meeting was due to start at 2 p.m. 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 percent to $1.3250 if the Cabinet is convinced of May’s deal later Wednesday.
Others are more downbeat. Even the Parliament vote won’t be the end of sterling volatility, according to Royal Bank of Canada strategist Adam Cole. With the exit from Europe set for March 29, “much of the longer-term uncertainty will remain unresolved and domestic political risk is arguably simply being pushed to the other side of the exit date,” he said.
He sees Euroskeptic ministers backing the prime minister to ensure Brexit is delivered, but “once we are out, they will be unleashed.”