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London - Pound traders’ expectations for price swings against the euro in the next six months are at the highest level since the currency bloc’s debt crisis as UK Prime Minister David Cameron seeks a deal on the terms of Britain’s membership of the European Union.
The measure of anticipated volatility climbed for a third day on Thursday before the negotiations in Brussels, which, if successful, kick-start a four-month referendum may campaign on the UK’s place inside the EU.
Cameron is seeking concessions to address British concerns about its relationship with the bloc, so that he can call his promised referendum for June 23, giving those in favour of an unprecedented British exit from the EU the shortest possible time to campaign.
With traders pushing back bets on the timing of a Bank-of- England rate-increase, and UK data painting a mixed picture of the economic recovery, concerns over an potential EU exit are compounding the pound’s woes. Sterling has weakened against all of its Group-of-10 peers since the start of the year and dropped to its lowest level in more than a year versus the euro last week.
“We’re in a situation of profound uncertainty,” said Neil Mellor, a currency strategist at Bank of New York Mellon in London. “The big thing from a currency standpoint is that nobody knows what it will mean. They don’t really know what it will mean for relations with the EU, they don’t know if they can trust the polls. There’s just one big question mark hanging over the market when it comes to the UK outlook.”
Volatility climbs
Six-month implied volatility for the pound versus the euro, a measure of anticipated price swings based on options, climbed to 11.93% at 11:50 a.m. London time, the highest since October 2011, based on closing prices.
Sterling advanced 0.8% to 77.27 pence per euro Thursday after dropping 0.9% last week. It depreciated to 78.98 on February 11, the weakest since December 2014. The pound rose 0.5% to $1.4368 after sliding to a two-week low of $1.4235 on Wednesday.
While the sound is still down 2.5% against the dollar this year, some British asset classes are managing to outperform. Investors who stood by UK stocks during this year’s slump are now better off than those who bet on any other European market, while UK government bonds are 2016’s best performing major securities in the Bloomberg World Bond Indexes.
“The community and markets probably haven’t focused on this issue enough,” Andrew Sheets, chief cross-asset strategist at Morgan Stanley in London, said in an interview on Bloomberg Television’s “Surveillance” with Caroline Hyde and Tom Keene.
“This is something we see weighing on UK assets relative to the rest of Europe, it’s a reason we are bearish on sterling and we continue to think that will be the case for the rest of summer.”
