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The Pound Is Now the Most Volatile Currency in the G-10

One Pound Prop After Another Is Removed as Brexit Risks Build

(Bloomberg) --

The pound is buckling under concerns about Brexit, and the Bank of England may add further pressure to the currency when it meets this week.

Sterling dropped as much as 0.8% against the dollar to 1.2119 on Tuesday, and was set for its worst slide in almost three years. The cost of insuring against volatility in the pound over a three-month period has climbed to the highest among the Group-of-10 currencies as concerns grow that U.K. Prime Minister Boris Johnson will opt for a no-deal Brexit.

The central bank is also expected to signal that it is unlikely to raise interest rates in coming months, removing any support for the currency, which is trading at around the lowest since March 2017.

The Pound Is Now the Most Volatile Currency in the G-10

Money markets are, in fact, pricing a more than 60% chance of a 25-basis point rate cut by December on concern the U.K. may exit the European Union without a divorce deal. That compares with just 20% in June, shortly after the central bank bucked global trends and cited the need to raise rates in coming years.

“With Boris Johnson now installed as PM, the Brexit saga is set to recommence,” strategists at JPMorgan, including Meera Chandan, wrote in a client note. “The BOE’s shift toward a neutral bias -- all but giving up hopes for continued normalization -- will do little to support” the currency.

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JPMorgan sees policy makers lowering their growth outlook while moving further away from raising rates when they announce their decision and release their quarterly inflation report on Thursday.

Three-month risk reversals for the pair slipped to 185 basis points in favor of selling sterling, the most bearish since April. The pound also fell against the euro and the yen.

The Pound Is Now the Most Volatile Currency in the G-10

Gilts, meanwhile, are headed for a third monthly rally and strategists foresee the gains extending. The yield on 10-year government bonds has fallen 19 basis points to 0.64% this month, and could slip below 0.50% in the event of a no-deal Brexit, according to Petr Krpata, the chief EMEA currency and rates strategist at ING Bank NV.

“The more Brexit uncertainty there is, and more it spills over negatively in the growth outlook, the more downward pressure on U.K. yields there will be,” Krpata said. “If early election weighs on sterling, as we expect, then U.K. rates and yields will go lower due to the mix of flight to safety and the Brexit uncertainty.”

To contact the reporter on this story: Anooja Debnath in London at adebnath@bloomberg.net

To contact the editors responsible for this story: Ven Ram at vram1@bloomberg.net, William Shaw

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