Pound Volatility Surges as Biggest Trader Sees `Brexit' Discount

  • Citigroup sees more volatility ahead of EU referendum
  • Sterling falls versus dollar in 2015 on rates divergence

Anticipated price swings in the pound versus the dollar surged to the highest level since the U.K. general election in May, with the world’s largest currency trader saying investors should brace for more.

Sterling is already trading 2 percent to 3 percent weaker than is suggested by traditional drivers such as interest-rate differentials, and this may be spurred by the prospect of a referendum on Britain’s membership of the European Union, according to Citigroup Inc. The U.K. government has signaled that this vote may take place as soon as June.

The pound is set for a second annual drop versus the dollar, also weighed down by speculation the Bank of England won’t be following the Federal Reserve’s lead and raise interest rates anytime soon. Money-market forwards aren’t pricing in a full 25-basis-point increase in Britain’s benchmark rate until November.

“Right now we don’t know for sure when the referendum is going to be,” said Josh O’Byrne, a London-based currency strategist at Citigroup. “It’s expected to be in June, but if it were confirmed to be so, then the expected volatility for that period can go still further. We’ve already priced in quite a lot, but maybe we still have a bit more room to go when things become more clear.”

Six-month implied volatility in the pound-dollar exchange rate touched 9.62 percent on Dec. 29, the highest since May 5, according to data compiled by Bloomberg. It was at 9.45 percent as of 12:43 p.m. London time Thursday, compared with an average 8.73 percent in the past year.

Sterling was little changed at $1.4830 on Thursday, leaving it with a drop of 4.8 percent during 2015. The U.K. currency gained 0.5 percent to 73.39 pence per euro.

U.K. government bonds advanced, with the benchmark 10-year gilt yield falling three basis points, or 0.03 percentage point, to 1.96 percent. The 2 percent security due in September 2025 rose 0.255, or 2.55 pounds per 1,000-pound face amount, to 100.355.

The gilt market closed early in London Thursday for the New Year holiday and will reopen on Jan. 4.

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