Traders brace for more sterling volatility as Brexit showdown looms

Traders are bracing for more big price swings in sterling between now and the expected October 31st Brexit date, with a three-month volatility gauge hitting its highest level of the year on Thursday.

British prime minister Boris Johnson’s move to suspend parliament for longer than usual at one of the most crucial junctures in recent British history triggered another bout of sterling volatility this week and further speculation over the likelihood of a no-deal outcome.

While the UK currency regained its poise somewhat on Thursday, trading at 90.5p against the euro, having previously traded at 91.2p the day before, three-month Sterling Implied Volatility – a gauge measuring expected price swings in the pound between now and the end of November – rocketed to its highest since December. The the six-month gauge was at its highest level since January.

Traders said much of the action was in investors rushing to protect themselves from more volatility rather than placing bets on further falls in the currency.

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"Irrelevant of Mr Johnson's real intentions, Wednesday's proroguing bombshell has without doubt increased the chances of a no-deal Brexit," said Justin Doyle, senior foreign exchange trader at Investec in Dublin.

“If I’d have been asked early on Wednesday morning where I thought the euro/GBP rate would close if news broke that the UK parliament were to be suspended for nearly five of the eight weeks it has to legislate before the 31st October Brexit deadline, without hesitation I’d have put a minimum of a £0.92 handle on it,” he said.

“So, needless to say, there was quite a bit of head scratching on Wednesday evening as it closed in/around the opening level of £0.9050 after climbing as high as £0.9120 earlier in the day,” he said.

Parity

While Investec still believes the UK will agree an amended version of former prime minister Theresa May’s deal, Mr Doyle warned sterling had the potential to move to parity with the euro and beyond in the event of a “messy” exit.

“ If things weren’t bad enough for the Irish export sector, it’s hard to see how a sharp 10 per cent plus (from current levels) devaluation of sterling can’t be anything but another chapter in their Brexit horror story,” he said.

Irish employers' body Ibec said the Brexit-related weakness in sterling was putting "acute pressure on the margins of Irish exporters". Chief economist Gerard Brady said previous Ibec research had shown that Irish food exports to the UK begin to fall at around 90p and any further increase towards parity would significantly impact on the competitiveness of Irish consumer exports in the UK market. "This would particularly impact SMEs which are less likely to have protection in the form of hedging or contractual arrangements," he said.

Head of foreign exchange and emerging markets at Bank of Ireland Philip Hartley said Mr Johnson's latest move see sterling remain under pressure as the perceived probabilities for both a no-confidence vote in his government or a no-deal Brexit continue to build.

“Market focus will now shift to the return of parliament next Tuesday to see if the opposition can garner sufficient support to propose a credible alternative route which should ensure continued elevated volatility in the currency until some clarity is restored,” he said. – Additional reporting: Reuters