Pound Traders Brace for Increased Turbulence as Summer Lull Ends

(Bloomberg) -- Pound investors hoping for a turnaround anytime soon could instead face more turbulence.

The U.K.’s and the European Union’s plan to negotiate Brexit continuously from now on suggests there will be more political headlines, potentially fueling volatility, according to strategists at Royal Bank of Canada and Australia & New Zealand Banking Group Ltd.

With U.K. markets shut for a holiday Monday and Thursday’s mortgage approvals data unlikely to generate much excitement, Brexit will remain the main focus for traders. While the pound was buoyed by U.K. Brexit Secretary Dominic Raab’s optimistic tone at a press conference last week, it’s still on course for a fifth monthly loss versus the dollar and the stakes are rising as the deadline to get a deal draws closer.

Pound Traders Brace for Increased Turbulence as Summer Lull Ends

“Sterling is likely to remain susceptible to Brexit headlines, rather than data,” ANZ analysts including head of currency research Daniel Been wrote in a note. “The news will intensify, as negotiators begin continuous talks so we expect more sterling volatility.”

Three-month volatility on the pound-dollar pair has picked up from the lows reached earlier this year, but still isn’t high enough to fully reflect Brexit-related risks, according to analysts. Banks including Morgan Stanley and JPMorgan Private Bank have recommended taking advantage of low option costs to hedge a no-deal outcome, while both ANZ and Royal Bank of Canada expect risk premiums to rise further.

The pound was little changed at $1.2842 as of 8:35 a.m. Monday, after gaining 0.8 percent versus the dollar last week. It held steady at 90.39 pence per euro, following a decline of 0.8 percent last week.

Rising Risk

With just over a month until the initial deadline that Britain set to reach a deal with Europe, the negotiations are still stuck on the Irish border issue and what kind of future relationships to pursue.

The risk of a no-deal Brexit is increasingly being priced in by investors, said Commerzbank AG currency strategist Thu Lan Nguyen. Her year-end forecasts peg the pound at 88 pence per euro and $1.32, compared with Friday’s levels of around 90 pence and $1.2850, respectively.

Given the uncertain outlook, a short position in sterling remains the right choice for Luke Hickmore, senior investment manager at Aberdeen Standard Investments. The no-deal contingency plans that the U.K. government began publishing last week have only served to bring Brexit concerns back to the forefront, he said.

“I think at the moment we’re likely to hold that through, targeting the $1.27 level,” he said, referring to the short position. “The closer we get to March next year, the more the market is expressing all of its concerns around the politics and the potential outcome through the pound.”

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