Bets on sterling swings have fallen to an almost three-month low even after UK lawmakers rejected Theresa May’s withdrawal plan and told her to renegotiate it with the European Union, which has warned it won’t budge. Given the risk of the whole deal collapsing, investors may reconsider positions that have driven volatility lower, according to SEB AB.
While the UK currency has gained about 2.5 per cent this year amid hope the two sides will eventually find a way forward, BlackRock Inc. has warned investors may be too complacent about the risk of an unfavourable outcome. May has promised to bring a reworked plan back to Parliament for a say by Feb. 13, or if not, to give members another opportunity to vote a day later.
“Falling volatility in recent weeks is related to the view that a majority of MPs never would accept a no-deal withdrawal, but with the response from EU officials in recent days people might reconsider this view again,” said Richard Falkenhall, a trading strategist at SEB AB. “The uncertainty should be reflected in implied volatility.”
Two-month sterling implied volatility, which covers the UK’s exit date of March 29, has dropped from a more than two-year high in December as concern about a no-deal Brexit fell. It traded at 10.6 per cent on Friday, down from above 15 per cent in December. The pound traded about $1.3090 as of 4:34 p.m. London time on Friday.
As well as Brexit uncertainty, pound investors will also have to contend with the Bank of England decision next week. While officials are forecast to keep interest rates unchanged on Thursday, some economists see the potential for a split to emerge on the Monetary Policy Committee as some members get increasingly concerned about accelerating wage growth. Any sign of a more hawkish tone among policy makers would support the currency.