Pound Traders Brace for Late Night News From EU Brexit Summit

(Bloomberg) -- Neil Jones is leaving his Mizuho office in the City of London at the usual time on Wednesday. But the potential for Brexit headlines in the currency market’s witching hour means he will be staying up late, glued to screens for news, prices and his hedge fund clients.

The market is betting on U.K. Prime Minister Theresa May and her European Union counterparts to agree a Brexit extension of up to one year at a summit in Brussels. May will make her case for a shorter delay to EU leaders around 5:30 p.m. U.K. time before leaving them to discuss it over dinner, which brings up the possibility of news coming after the New York close and into an infamously volatile period for currency markets.

The window of trading between the close in New York and the Tokyo open has provoked several outsized moves in currency markets in recent years, most recently when the yen surged in January. In October 2016, the pound plunged more than 6 percent in just a few minutes.

“This situation is a typical low probability-high impact situation, which is always difficult to handle in financial markets,” said Andreas Koenig, head of global currency at Amundi Asset Management. “A bad surprise could spark a big unexpected move.”

The pound edged up 0.2 percent to $1.3073 by 3:50 p.m. in London. The currency has whipsawed in recent months on the changing prospects for an economically damaging no-deal exit. The U.K. and EU are widely seen agreeing some sort of Brexit delay, just two days before Britain could tumble out of the bloc.

If the EU doesn’t push back the departure date it would trigger a significant move lower in the pound, Koenig said. The conditions imposed on any extension could also send the currency lower if there is anything unexpected, but this is likely to be more of a limited move, he said. Either way, Mizuho’s Jones said he will be formulating fresh pound forecasts on the developments.

In recent weeks the U.K. currency has failed to build on gains in the first two months of the year, which turned it into the best performer among peers, as traders are reluctant to take a bet on further strength while uncertainty over the Brexit deadline lingers. Gauges of volatility over one week and one month have fallen back after spiking in March.

“The surprise will now be if we leave on Friday deal-less,” said Jones, the head of hedge-fund currency sales at Mizuho Bank Ltd. “That would be a shocker and send the pound nose-diving.”

To contact the reporter on this story: Charlotte Ryan in London at cryan147@bloomberg.net

To contact the editors responsible for this story: Ven Ram at vram1@bloomberg.net, Neil Chatterjee, Anil Varma

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