Pound Surges as Traders Gear Up for Finish to Brexit
Pound Rebounds After EU’s Barnier Sparks Hopes for Brexit Deal
The pound surged more than 1% and U.K. government bonds slid as Brexit negotiators moved closer toward a Brexit deal.
Sterling rose to the highest in almost five months and domestic stocks rallied after European officials said there was optimism that there could be a breakthrough by the end of the day. Option traders are pricing in the biggest pound swings since July 2016 over the coming week on the potential for a deal being signed off by the region’s leaders at a summit starting Thursday.
The currency market hasn’t been this jumpy over Brexit since the aftermath of the referendum that set the process off. The past few days have been tumultuous for sterling, with conflicting Brexit headlines forcing the market to reposition for a swift and brutal move once there is clarity on how Britain will exit the bloc.
Officials cautioned that talks haven’t finished yet but there are indications that a legal text will be presented to national delegations on Wednesday morning. Time is running out for negotiators to present a draft deal to Thursday’s meeting of European leaders.
For a story on key pound technical levels, click here.
“Whipsaw moves likely characterize the exceptionally high-volatility environment in which the pound will operate during the remainder of October,” MUFG currency strategist Fritz Louw wrote in an investor note. “However, the overall direction of travel is now up amid progress towards a last-minute Brexit deal.”
Volatility Jumps
Sterling rallied as much as 1.5% Tuesday to $1.2797, the strongest since May 21. Against the euro, it advanced 1.1% to 86.48 pence, the strongest since mid-May. One-week implied volatility in the pound-dollar pair rose as much as 171 basis points to touch 18.85%, a level not seen since July 7, 2016.
The surge in demand for options that insure against big moves comes as the pound faces two sharply different paths. The currency could rally to $1.30 if a Brexit deal is struck with the bloc, and Parliamentary approval of such an accord could fuel a further rally toward $1.40, according to strategists. On the other hand, a failure to reach an agreement could send the U.K. toward an economically disruptive no-deal outcome, which could see sterling plunge to $1.11.
U.K. government bonds, which have been a haven from Brexit risk, slid to send 10-year yields up by seven basis points to 0.71%. European equities and U.K. domestic stocks surged on the news about the progress in Brexit negotiations. The FTSE 250 Index jumped 1.5% while the Stoxx Europe 600 Index gained 1.2% and was set for the highest level since May 2018.
Bank of England Governor Mark Carney told a parliamentary committee Tuesday that the financial system is well-prepared for the risk of a no-deal Brexit. He said banks were trimming their exposure to currency markets and could withstand extremes, to the extent that “they could be shut out of the foreign exchange market for 14-plus trading days, which is unprecedented.”
--With assistance from Ksenia Galouchko.
To contact the reporters on this story: Charlotte Ryan in London at cryan147@bloomberg.net;Vassilis Karamanis in Athens at vkaramanis1@bloomberg.net
To contact the editors responsible for this story: Paul Dobson at pdobson2@bloomberg.net, Neil Chatterjee, Anil Varma
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