Investors have begun to hedge for higher levels volatility in the UK pound after Prime Minister Theresa May on Tuesday called for a snap election that will be scheduled for this summer.
Implied two-month volatility in the pound-dollar pair climbed by as much as much as 0.395 points to 8.94 per cent – the biggest rise since March 14, according to Bloomberg data.
The metric tracks demand for options that are used to bet on or hedge against currencies swings. Today’s jump in volatility comes as Mrs May called for a general election on June 8 as she looks to bolster her mandate to lead Britain through its two-year divorce from the EU.
Sterling has shot 1.2 per cent higher on Tuesday against the US dollar today to $1.271 – its best one-day jump in four months – and a 10-week high.
Mrs May’s decision, which came as a surprise to many UK politicians, is bullish for the pound, said Derek Halpenny, head of European markets research at Bank of Tokyo-Mitsubishi UFJ, who added that he is now “more confident” sterling will strengthen to hit $1.325 by the end of the year.