Photographer: Chris Ratcliffe/Bloomberg

Pound Volatility Is Highest Since Debt Crisis as Talks Drag On

  • EU leaders meet in Brussels to discuss U.K.'s membership terms
  • Sterling weaker against most G-10 peers since start of year

Pound traders’ expectations for price swings against the euro are at the highest since the currency bloc’s debt crisis in 2011 as U.K. Prime Minister David Cameron seeks to renegotiate Britain’s membership of the European Union.

The measure of anticipated volatility in the next six months climbed for a fourth session Friday as negotiations spilled over into a second day in Brussels. If successful, they may kick start a four-month referendum campaign on the U.K.’s place in the EU. Sterling weakened as Cameron seeks concessions to address British concerns about its relationship with the bloc, so he can call his promised referendum for June 23. That would give those in favor 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 U.K. economic data painting a mixed picture of the recovery, concerns that Britain may exit the EU are compounding the pound’s woes. Sterling has weakened against all except one of its Group-of-10 currency peers this 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 Corp. 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 U.K. outlook.”

Volatility Climbs

Six-month implied volatility for the pound versus the euro, a measure of price swings based on options, climbed to 11.99 percent as of 2:23 p.m. in Tokyo, the highest level since October 2011 based on closing prices.

Sterling dropped 0.2 percent to 77.62 pence per euro after depreciating to 78.98 on Feb. 11, the weakest since December 2014. The U.K. currency was little changed at $1.4336.

The pound rose on Thursday after European Commission President Jean-Claude Juncker told reporters before the summit that an accord to keep Britain in bloc was within reach. His optimism was echoed by Slovakia’s Premier Robert Fico, who said he could see a compromise agreement and that EU leaders care about the U.K. remaining.

“Confidence over a deal to keep the U.K. in Europe is receiving a big boost,” said Neil Jones, head of hedge-fund sales at Mizuho Bank Ltd in London. “The pound is powering ahead against the euro.”

U.K. Outperformance

While the pound has weakened 2.7 percent against the dollar this year, some British asset classes are managing to outperform. Investors who stood by U.K. stocks during this year’s slump are now better off than those who bet on any other European market.

“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 U.K. 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.”

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