Pound Volatility Shows Traders Braced for Article 50 Trigger

  • Gauge of future sterling price swings picks up after March
  • PM May has pledged to activate mechanism in first quarter

Rabobank's Foley: Brexit Ruling Priced in to the Pound

The pound’s rally to a two-month high is masking an incoming blot on traders’ radars.

The currency’s implied volatility curve, an indication of anticipated price swings, shows a jump between the three- and four-month measures -- a period that encompasses Prime Minister Theresa May’s self-imposed deadline to trigger formal negotiations for the nation’s exit from the European Union. That kink represents concerns of heightened volatility for sterling, which remains 2016’s worst-performing major currency following the U.K.’s June vote for Brexit.

“There’s definitely going to be more volatility,” said Derek Halpenny, European head of global markets research at MUFG in London. Volatility rises “when the market is given a specific deadline” and the increase isn’t surprising “given the way sterling has traded on political developments,” he said.

  • Four-month pound-dollar implied volatility is at 10.39 percent, compared with 10.07 percent for the three-month measure. Two-month volatility is 10.05 percent.
  • The pound fell 0.7 percent to $1.2592 as of 10:15 a.m. in London, having touched $1.2775 on Tuesday, the highest since Oct. 4.
  • May signaled Tuesday she’ll accept demands for more details on her Brexit strategy as long as the opposition Labour Party supports her plan to start the process by the end of March.
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