Pound Volatility Cooling Off May Be Calm Before Election Storm

Pound traders looking forward to quiet before the U.K.’s December election could be in for a jolt, at least if recent history is any guide.

A gauge of swings in the currency over the next two months is hovering near six-week lows, on receding fears of a no-deal 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, the rough and tumble of the campaign could still throw the pound off course.

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.

Despite the immediate calm, volatility could climb if polling points to a resurgent socialist Labour Party 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.

“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.”

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.

This article has appeared on Investing.com