Pound Volatility Surges Before Election Amid Outcome Uncertainty

Sterling volatility versus the dollar jumped to the highest level since 2010 as traders priced in the uncertainty of an election that looks set to produce no clear winner.

The pound fell against the U.S. currency as the Bank of England kept interest rates at a record-low 0.5 percent. Meanwhile, minutes of the latest Federal Reserve meeting showed policy makers haven’t ruled out raising borrowing costs in the U.S. in June, boosting demand for that nation’s currency. Traders are also paying more to hedge against sterling losses over the next month as concern over the effect of the May 7 election outweighs signs of economic growth.

“We’ve seen a pick-up in implied volatility and pick-up in demand for downside protection for the pound covering the election period,” said Lee Hardman, a foreign-exchange strategist at Bank of Tokyo-Mitsubishi UFJ Ltd. in London. “It’s what you’d anticipate given the pick-up in political risk. A BOE rate hike is off the table until next year.”

A measure of anticipated price swings in the pound against the dollar in a month’s time climbed as much as 2.9 percentage points to 13.64 percent, the highest since June 2010, according to data compiled by Bloomberg. That’s up from 6.9 percent at the end of last year.

The pound declined 0.9 percent to $1.4739 at 4:45 p.m. London time and was little changed at 72.44 pence per euro.

Bearish Bias

The premium for one-month options to sell the pound against the dollar over those to buy surged to as high as 2.02 percentage points, the most since Sept. 19, the day after the Scottish vote for independence, according to 25-delta risk-reversal prices compiled by Bloomberg.

U.K. house prices increased 0.4 percent in March from the previous month, mortgage lender Halifax said on Thursday. Earlier this week, Markit Economics Ltd. said data suggested the economy grew 0.7 percent in the first quarter, faster than the 0.6 percent increase in the final three months of 2014.

Sterling has weakened about 2 percent in the past month against a basket of peers tracked by Bloomberg Correlation Weighted Indexes, the worst performance after Sweden’s krona.

Rate Forecast

With inflation at zero, borrowing costs were held by the BOE, matching the prediction of all 44 economists in a Bloomberg survey.

U.K. central-bank officials are in a quiet period until the election. Before the so-called purdah, their comments suggested there was a split in the MPC about the outlook for inflation. Investors are all but ruling out a rate increase before the middle of next year, Sonia forward contracts show.

BOE Governor Mark Carney said in March the next move in borrowing costs will most likely be up, while Deputy Governor Ben Broadbent has said the risk of persistent deflation remains low. This followed comments by Chief Economist Andy Haldane, who said officials must be ready to cut rates further if needed and that the inflation outlook was “skewed to the downside.”

U.K. government bonds were little changed as Britain posted its widest trade deficit in seven months in February as sales to the U.S. and countries outside the European Union declined.

The 10-year was at 1.57 percent. The price of the 5 percent gilt due in March 2025 was 131.335 percent of face value.

The goods shortfall of 10.3 billion pounds followed an upwardly revised deficit of 9.2 billion pounds in January, the Office for National Statistics said. Economists had predicted a gap of 9 billion pounds.

The trade data “reinforce the picture that the U.K. economy is still heavily reliant on domestic consumer spending,” said Daniela Russell, a U.K. rates strategist at Credit Suisse Group AG in London.

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