The pound may be experiencing a period of relative stability, but the signs are that it’s an uneasy calm that traders shouldn’t get complacent about, Gulf Times reports.
While a measure of anticipated volatility fell last week, Sterling is still seen posting the biggest price swings among its Group-of-10 peers over the next six months.
And though the pound is little changed over the past five days, it has still whipsawed on the particular Brexit-related news, showing it remains vulnerable to the drip-feed of headlines about the UK quitting the European Union.
Societe Generale SA is one of the biggest bulls in Bloomberg’s pound survey, predicting an almost 5% rally by year-end to $1.28 and estimating that the UK currency has already priced in many of Brexit’s risks.
Yet it still acknowledges the dangers facing the pound, which is the worst- performing major currency this year with a 17% drop, and which two weeks ago sank to a 31-year low in a so-called flash crash.
“We’ve made a reasonable adjustment for the outcome of this vote very early, very quickly,” said Kit Juckes, a global strategist at SocGen in London.
“But because we’ve arrived here so early, and because the news flow is likely to be bad, we’ll occasionally get periods where there’s a loss of confidence. We could still get abrupt moves.”
As well as pricing in many of the perils of Brexit – including the prospect that other European countries will play hardball over the terms – the exchange rate of about $1.22 also reflects the potential for an interest-rate cut by the Bank of England and a downturn in the UK economy, according to Juckes. He also sees a rate hike by the Federal Reserve as being priced in and says Sterling will probably be close to current levels in a year’s time. The pound has become the main vehicle for investors to express their dismay about Britain quitting the EU, first at the vote itself and more recently over suggestions the government is headed for a so-called hard Brexit where unfettered access to Europe’s single market is sacrificed for immigration controls.
That hasn’t changed. While Sterling rose this week for the first time since September, it fell as much as 0.6% on Thursday after European Union President Donald Tusk said there’ll be no pre-negotiations before Britain triggers divorce proceedings.
Implied six-month volatility for the pound-dollar rate dropped 0.5 percentage point last week to 11.7%, the first decline in more than a month, data compiled by Bloomberg show. Yet the rate is still about a half-point more than on the day of the UK’s June 23 referendum.
The pound has found some support as traders recognise that its depreciation has benefits for a nation that’s struggling to boost exports and needs to fund a record current-account deficit. Sterling traders were also encouraged by UK Chancellor of the Exchequer Philip Hammond’s suggestion this week that the government wants to keep all options open as it leaves the EU.
Still, most of the pound’s moves in recent months have been downward – and there’s little suggestion that this is set to change. Pound forecasters polled by Bloomberg are more bearish than ever on the UK currency’s prospects.
And though the $1.25 median year-end prediction is now stronger than the exchange rate, that reflects how difficult it’s been for strategists to keep pace with sterling’s slide, rather than optimism about a bounce.
“What we should expect now is a certain amount of quiet before the next lurch lower,” said SocGen’s Juckes.