It’s fair to say the pound has had a bumpy ride since last June’s vote to leave the EU, but with traders now left waiting for Article 50 to be triggered, a level of calm has finally descended on the currency, with one measure of volatility hitting its lowest level since well before the referendum.
Sterling’s 10-day historical volatility, which tracks its rate of change against the dollar over the last 10 days of trading, fell to its lowest level in more than a year on Thursday.
The rapid fall emphasises how muted the currency’s movements have been since Theresa May outlined her priorities for Brexit negotiations last month.
Despite some temporary swings, the pound has ended the day between 1.2450 and 1.2550 every day since the start of the month. Economic data, such as Tuesday’s lower-than-expected inflation figures, did little to move sterling beyond its recent trading range, despite raising doubts about the chances of an interest-rate risein the near future.
Options traders, meanwhile, aren’t signalling much chance of a change in the coming weeks. On Wednesday, both one-week and one-month implied volatility, which measure demand for options to hedge against big currency swings over a set period, hit their lowest levels since September, after spiking in the run-up to Mrs May’s speech. Lower implied volatility reflects lower expectations of currency movements over the coming period.
Viraj Patel, foreign exchange strategist at ING, attributed the recent calm to the fact that “sterling hates uncertainty”. He said the currency has benefited from the increased clarity on the government’s negotiating stance and the apparent likelihood that the UK and EU will agree some sort of transitional arrangement to prevent a “cliff-edge” of vanishing access to markets on the day the UK leaves the EU.
While he believes a return to the volatility spikes seen over the last few months is unlikely, that doesn’t mean the currency is out of the woods completely.
Mr Patel added:
Will this [calm] continue? Our base case is no. We’re not expecting a sharp decline, but there will be an orderly adjustment towards a cyclical low around $1.15, or at least below $1.20.