Pound’s Wild Day Is Sign of Brexit-Induced Volatility to Come

(Bloomberg) --

Traders are bracing for more erratic behavior from the pound after it whipsawed on conflicting news about trade negotiations between the U.K. and European Union.

It first fell as much as 0.8%, on reports that officials were at loggerheads on the issue of state aid and that the EU was starting legal proceedings against the U.K. over its plans to breach the terms of its withdrawal agreement. Then it gained as much as 0.4% on reports officials may have reached a compromise on state aid. And in a final twist, the currency dropped after EU officials said there’s no increased optimism in Brexit talks.

Those swings lifted sterling’s one-week implied volatility to the highest since Sept. 15, making the currency the most erratic among Group-of-10 nations after Norway’s krone. It’s a sign that the pound, which spent most of 2019 swinging between positive and negative headlines on Brexit, is once again serving as a barometer to trade negotiations after a year so far dominated by Covid-19.

“Things really changed with the publication of the internal market bill,” said Adam Cole, head of currency strategy at RBC Europe. “Brexit had been dormant until that point, but it will be the key driver for the pound for the rest of the year.”

Prime Minister Boris Johnson is planning to introduce legislation that would override parts of the Brexit withdrawal agreement he signed, which would be in conflict with international law. The move, together with the EU’s legal response, highlight tension between the two sides as trade negotiations enter a critical phase. The U.K.’s transition period from the EU ends at the end of the year.

Still, Kaspar Hense, senior portfolio manager at BlueBay Asset Management says he remains bullish on the pound, despite the initial slump in the currency Thursday amid the competing Brexit headlines.

“The internal market bill is a sideshow to the trade talks” and “will be taken off the table when the deal is done,” he said.

Hense started buying the pound versus the euro last week, ending a bearish bet initiated in July.

The pound fell 0.3% as of 1:48 p.m. in New York to $1.2885, and it was down 0.5% against the euro to 91.15 pence.

Ulrich Leuchtmann, head of currency strategy at Commerzbank AG, expects the pound to trade at 92 pence against the euro by the end of the year assuming a weak trade deal is reached, though he’s still flagging the risk of a no-deal scenario to clients.

“In that case, they should prepare for something like 15% pound depreciation” over a prolonged period, he said.

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