Pound Volatility Jumps on Increased Possibility of 2016 EU Voteby and
Six-month measure advances to highest level since May
Cameron optimism over EU deal may mean June 2016 referendum
Six-month implied volatility on the pound against the dollar jumped as Prime Minister David Cameron gave his strongest indication yet that Britain’s referendum on its European Union membership could be held next year.
The measure climbed to the highest level since May as Cameron’s optimism that he can seal a deal on Britain’s relationship with the EU stoked speculation he will call a referendum on continued membership as early as June.
Cameron said that it was possible to reach a deal by February. That may mean he would be able to start the process of legislation needed to hold a vote, possibly leading to a referendum within four months.
“A June 2016 referendum may be on the cards,” said Neil Jones, the London-based head of hedge-fund sales at Mizuho Bank Ltd. “A yes or a no vote right now calls for long vol though June. It could go either way.” A long position is a bet an asset will rise.
The increase in longer-term volatility came as the one-week measure headed for its biggest weekly slide since September after the Federal Reserve raised U.S. interest rates for the first time in almost a decade, ending months of speculation about the path of monetary policy in the world’s largest economy.
Sterling dropped to an eight-month low versus the greenback Thursday after the Fed’s decision underscored the divergence in monetary policy between the U.S. central bank and the Bank of England.
“It’s going to get choppy” for the pound, said Jane Foley, a senior currency strategist at Rabobank International in London. “There’s going to be a lot of indecision about when the U.K. hikes interest rates and indecision about when the Fed are next going to hike.”
Six-month implied volatility for the pound versus the dollar, a measure of anticipated price swings based on options, climbed 20 basis points, or 0.2 percentage point, to 8.68 percent as of 3:56 p.m. London time. That’s the highest level since May 26, based on closing prices.
One-week volatility dropped 250 basis points this week, the steepest decline since Sept. 18.
Speaking to reporters at the end of a two-day meeting with his EU counterparts, Cameron said that “2016 will be the year we achieve something really vital: fundamentally changing Britain’s relationship with the EU, and finally addressing the concerns of the British people about our membership.”
Sterling was little changed at $1.4887 after reaching $1.4865 Thursday, the lowest since April 21. The U.K. currency weakened 0.2 percent to 72.82 pence per euro.
Traders aren’t fully pricing in a rate increase of 25 basis points from the BOE until February 2017, according to forward contracts based on the sterling overnight index average, or Sonia.