Pound Due the Calm After the Storm as Brexit Effect Overshadowed

  • Currency is retracing its losses since the June referendum
  • Yet no great rally predicted, so consolidation is watchword

After a torrid few months, the omens are lining up for a calmer time ahead for the pound.

Sterling volatility, which surged to a post-financial-crisis high after Britain voted to leave the European Union, has fallen to the lowest since early October. The pound has retraced some of its post-Brexit losses and is the only currency to have risen versus the dollar this month.

The economy is also helping, with robust consumer spending helping to offset official predictions for a slowdown next year as well as concern that the government will have trouble meeting its target of pulling the EU exit trigger by March. And Donald Trump is having an effect: his election as U.S. president, together with rising political risks across Europe, are giving traders something else to focus on other than Britain quitting the bloc.

For an overview of Europe’s political headwinds, click here.

“We have priced in a lot of bad news and Brexit fears, and now it’s wait and see,” said Sonja Marten, head of currency strategy at DZ Bank AG in Frankfurt. “The positive view on the economy helps.”

For all the pound’s recent resilience, no great rally is predicted. Analysts surveyed by Bloomberg see the U.K. currency sinking to $1.22 by March, from about $1.24 in London on Friday. That’s a drop of about 2 percent -- a fraction of its 16 percent slide this year.

Sterling is now only the seventh-most volatile currency in the G-10, compared with the second-most at the start of this month. Implied three-month pound-dollar volatility fell to 10.1 percent, the lowest since Oct. 3 and down from as high as 21 percent on June 24, the day after the U.K.’s referendum.

“Basically, the problems have moved elsewhere,” said Peter Frank, global head of Group-of-10 and Asian currency strategy at Banco Bilbao Vizcaya Argentaria SA in London.

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