Pound's Outlook Is Thrown Into Turmoil as Policy Views Dashed

  • Sterling-dollar volatility rises most since March this week
  • Gap between BOE and Fed rate moves widens to almost a year

The biggest jump in pound volatility since March this week shows investors are bracing for a wild ride into 2016 as the outlooks for U.K. and U.S. monetary policy diverge.

For a currency that’s not generally prone to large price swings, sterling had an eventful week. It slid to the lowest level against the dollar since April on Friday after the BOE damped wagers it’s moving closer to raising interest rates and a pickup in U.S. employment bolstered the case for an imminent increase by the Federal Reserve.

With little in terms of BOE policy makers’ speeches due next week, British jobs data due on Nov. 11 may be the pound’s main driver, said Ned Rumpeltin, European head of currency strategy at Toronto-Dominion Bank in London.

“While we do believe the sequencing of the Fed first, followed by the BOE second, it appears now there’s more of a gulf between those two than perhaps there was,” Rumpeltin said. “It leaves the pound in a much more complex backdrop” and investors’ focus will “shift very quickly” to domestic events.

Three-month implied volatility for the pound versus the dollar, a measure of anticipated price swings based on options, climbed to 7.98 percent as of 6:30 p.m. in London on Friday, from 6.94 percent a week before. That’s set for the highest end-of-day level since September.

The pound fell 2.5 percent this week to $1.5036, after reaching its lowest level since April 23. It touched a 2 1/2-month high of 70.42 pence per euro on Thursday, before paring its gains and ending the week at 71.38 pence.

BOE Governor Mark Carney dealt a blow to sterling bulls on Nov. 5 by signaling that the U.K. isn’t yet ready for tighter policy. Across the Atlantic, U.S. payrolls for October beat the most optimistic forecast in a Bloomberg survey, encouraging speculation the central bank in the world’s largest economy is pulling away from its U.K. counterpart.

Forward contracts based on the sterling overnight index average, or Sonia, indicated that a full quarter-point boost to the BOE’s main rate won’t come until November 2016. Futures pointed to a 70 percent chance of the Fed increasing borrowing costs next month.

Treasury yields rose as a U.S. rate increase became more probable, dragging up yields on government bonds around the world.

The 10-year gilt yield climbed 12 basis points, or 0.12 percentage point, to 2.04 percent this week, after reaching the highest since July. The 2 percent bond due in September 2025 fell 1.04, or 10.40 pounds per 1,000-pound face amount, to 99.66.

Andreas Koenig, the Dublin-based head of European foreign-exchange at Pioneer Investments, said a gap of almost a year between the two central banks raising rates is “too wide,” while adding he’s wary of the pound in the short term.

“We stay away from sterling for now,” he said. “We think the currency will come under further pressure in the near term after the market was caught off guard by the dovish comments from the Bank of England.”

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