Investors are braced for an unnerving ride in foreign exchange markets in the run-up to the Halloween deadline for the UK’s exit from the EU.
Shifts in the options market, where bets are made on exchange rates, show expectations for sterling volatility have hit their highest level since the start of the year. Bets shot up on Wednesday after Boris Johnson’s government took the unusual step of signalling its intention to suspend parliament in a bid to stop MPs blocking a no-deal Brexit.
The prime minister is set to suspend parliament for at least a month, shortening the time available to MPs who hoped to introduce a bill to force the government’s hand on Brexit.
Investors’ expectations for swings in sterling over the next three months rose 5.5 per cent on Wednesday to their highest since January when former prime minister Theresa May tried to force her original Brexit deal through the House of Commons.
Moves in contracts for one-month volatility were sharper. These rose as much as 7.5 per cent, indicating that some investors expected a decisive break in the currency in one direction or the other to occur in September.
“The pound appears to be taking the strain of any news flow related to Brexit and we would expect the volatility to continue,” said Georgina Taylor, a fund manager at Invesco.
The pound has fallen sharply under the new government as traders reassessed the probability of the UK leaving the EU without a deal. Over the past six weeks sterling has traded within a range of between $1.20 and $1.23.
On Wednesday, the pound was the worst-performing developed market currency, falling as much as 1 per cent against the dollar to trade below $1.22 before regaining some lost ground.
Richard Falkenhall, senior FX strategist at Nordic bank SEB, said the pound was likely to fall further following the developments in Westminster. “We are now getting into what seems to be an ugly battle between the new pro-Brexit government and the lower house; a battle in which apparently all means will be used to reach the objective, either to leave on 31 October or to delay a withdrawal,” he said.
Paul Dales, chief UK economist at Capital Economics, said he expected developments to become “very hectic” as soon as next week. “Parliament may try to make the most of one of its last opportunities to prevent a no-deal Brexit by trying to bring down the government,” he said.
Get alerts on Pound Sterling when a new story is published