Pound’s Future Price Swings May Have Been Curtailed by BOE

(Bloomberg) -- Welcome to a new reality for the pound. One that could turn out to be a lot less volatile.

The Bank of England’s January policy meeting was one of the most unpredictable in recent years. Yet there were no expectations in the options market for large moves in sterling, even with the odds of a cut finely balanced at around 50-50.

Bets for further sterling turbulence remain low according to volatility gauges. The days when cable traded in wide ranges of 100 or 200 pips may be a thing of the past, or at least no longer the norm for the U.K. currency.

Expectations for large price swings in the near-term may even fall further, as sterling-specific risk factors move further out into the year, centered on the prospects of the U.K. failing to reach a trade deal with the European Union by Dec. 31.

That means sterling may be about to move in line with the rest of the Group-of-4 nations when it comes to both implied and realized volatility, as the premium created by Brexit-related political uncertainty fades relative to the euro, the yen and the Swiss franc. Last year the pound’s volatility was more in line with emerging-market currencies such as Mexico’s peso.

One-month implied volatility in the pound against the dollar now trades at 6.10%, its lowest since July 18. Demand for options that pay out on large moves stayed near the lower end of a range since April 2018, the so-called butterfly shows.

• NOTE: Vassilis Karamanis is an FX and rates strategist who writes for Bloomberg. The observations he makes are his own and are not intended as investment advice

To contact the reporter on this story: Vassilis Karamanis in Athens at vkaramanis1@bloomberg.net

To contact the editors responsible for this story: Dana El Baltaji at delbaltaji@bloomberg.net, Michael Hunter, Neil Chatterjee

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