Pound Complacency Will End With Bang If 2017 Vote Is Any Guide

(Bloomberg) --

Pound traders looking forward to quiet before the U.K.'s December election could be in for a rude awakening.

A gauge of swings in the currency over the next two months is hovering near six-week lows, following a delay to Brexit and signs that a Conservative Party victory could help to stabilize British politics. Yet if the 2017 snap election is anything to go by, a surge in the polls by the Tories' opponents could still knock the currency off course and drive volatility back up.

This time around, turbulence could return on any boost for the Labour party and its socialist agenda, the Brexit party and its no-deal strategy, or a hung Parliament that could prolong the stalemate in Westminster.

Two-month volatility jumped when then-Prime Minister Theresa May announced in April 2017 that a snap poll would be held in June the same year. Yet it quickly reversed course and hit fresh cycle lows, before rising again as the election loomed into view.

Jeremy Corbyn's Labour did better than expected and May ultimately lost her parliamentary majority before failing to secure an exit from the EU.

“All we can say at this point is, with the Tories no longer the party of no deal, Tories up in the polls is good and Labour up is bad,” said Adam Cole, head of currency strategy at RBC Europe. “We're stuck in a $1.2750-$1.3000 range until we get a steer either from the polls starting to shift, or the major parties shifting policy.”

Options currently show the market cooling off following the most turbulent month for the pound in nearly three years. Realized volatility surged as traders braced for a chaotic exit from the European Union in October, then saw the prospect vanish as Britain secured a third extension, this time until Jan. 31.

Concerns about a no-deal Brexit sent the U.K. currency briefly below $1.22 on Oct. 8, only for the pound to enjoy its best two-day run in a decade days later when the potential for a divorce deal sent sterling flying.

Short- and medium-term positioning turned more balanced after U.K. Prime Minister Boris Johnson won lawmakers' backing for his Brexit deal. Appetite for longer term volatility eased further when he secured an election for Dec. 12.

Demand for options trades that will pay off following a large swing in the pound before Nov. 31 currently stands near a two-month low. According to Bloomberg's options-pricing model, there is a 70% probability that the pound will trade within a 1.2650-1.3250 range against the dollar in November.

• 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

--With assistance from Charlotte Ryan.

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

To contact the editors responsible for this story: Paul Dobson at pdobson2@bloomberg.net, William Shaw, Michael Hunter

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