Pound Heads for Weekly Drop as Cameron Seeks `Brexit' Deal

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

Does ‘Brexit’ Uncertainty Mean Sterling Weakness?

The pound headed for its biggest weekly decline in more than a month against the dollar as David Cameron stepped up efforts to reach a deal with fellow European leaders over the terms of U.K. membership of the bloc.

Expectations for price swings in the pound against the euro over the next six months climbed to the highest since 2011 as sterling whipsawed Friday. With traders already pushing back bets on the timing of a Bank of England interest-rate increase, the prospect of a vote on leaving the world’s largest trading bloc is causing further concern, helping push down the pound against all but one of its Group of 10 peers in 2016.

U.K. Prime Minister Cameron had been aiming to seal a deal at the discussions, setting him up to announce a referendum for as soon as June 23 on his country’s place in the EU. With the possibility of negotiations dragging into the weekend, sterling held a three-week slide against the euro. The premier canceled a meeting of the U.K. cabinet to hold further meetings with his European counterparts as talks continued into Friday evening.

“It’s likely we’ll still get something that gets us a referendum on this in June but that there will be enough questions within the agreement to encourage the ‘out’ camp,” said Kit Juckes, a global strategist at Societe Generale SA in London. “I can’t imagine it becoming clear who will win, so I’ve got another four months of uncertainty on the currency. Is the market now bearish enough on sterling? My bias is still negative.”

Volatility Climbs

The pound dropped 1.2 percent this week to $1.4329 at 5:04 p.m. London time. It was little changed at 77.62 pence per euro after reaching 78.98 on Feb. 11, the weakest since December 2014.

Six-month implied volatility for the pound versus the euro, a measure of price swings based on options, touched 12.12 percent Friday, the highest level since October 2011.

Even as the pound declines, other British asset classes are holding up. U.K. government bonds are 2016’s best performing major securities in Bloomberg World Bond Indexes, while the nation’s stocks are outperforming other major European markets by declining at a slower pace than their peers.

Gilts were little changed this week with the 10-year yield at 1.41 percent. The price of the 2 percent security due in September 2025 was at 105.21 percent of face amount.