Pound Volatility at Three-Year Low Reflects Bets on Brexit Deal

(Bloomberg) -- For investors in the pound, it looks as though a Brexit transition deal is already in the bag.

While low volatility is being seen across Group-of-10 currencies as markets slowly return from holiday mode, the pound's case is striking as a European Union summit in March is seen as a deadline to agree a transition with the bloc to ensure banks with London headquarters don't begin jumping ship. Still, three-month volatility on cable hit the lowest since December 2014 on Friday.

“Fairly strong expectations that a post-Brexit transition phase will be agreed early in 2018 could be lessening volatility,” said Jane Foley, head of currency strategy at Rabobank. “That said, I would see the potential for greater volatility in the pound in 2018 relative to some other G-10 currencies given the potential for political uncertainty.”

The pound has climbed above $1.35 this year on optimism about progress in Brexit talks and expectations for another interest-rate rise from the Bank of England. It could fall back “into the $1.20s” if the March summit fails to yield an agreement on transition as it would raise doubts about meeting an October deadline to get an outline on the future relationship with the EU, said Nick Verdi, head of Group-of-10 currency strategy at Standard Chartered Plc.

To contact the reporter on this story: Charlotte Ryan in London at cryan147@bloomberg.net.

To contact the editors responsible for this story: Ven Ram at vram1@bloomberg.net, Neil Chatterjee, Marco Bertacche

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