Pound Volatility Rises on Earlier-Than-Expected July UK Vote
(Bloomberg) -- A measure of the pound’s expected swings jumped as traders prepare for an earlier-than-expected election in the UK.
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The currency’s two- and three-month implied volatility rose over 20 basis points on Wednesday, the most since mid-April, after days of mounting speculation about the timing of the vote. Prime Minister Rishi Sunak confirmed that an election will be held on July 4.
Public opinion polls have long heavily favored opposition leader Keir Starmer and his Labour Party to win. Today’s moves, however, were among the first signs that the market is starting to prepare for the vote, given the new clarity over the election date.
“We’re mainly seeing this news play out in the sterling vol structure, with shorter-term volatility receiving a bid on the news,” said Simon Harvey, head of FX analysis at Monex Europe. “With enough daylight between Labour and the Tories in the polls, it seems as if the election outcome has already been factored in across other markets, hence why spot FX and rates haven’t really been impacted.”
The move higher in implied volatility came from a very low base, with the two gauges trading around the lowest since March before the announcement. Even after the leap, they remain below their average over the last year.
The pound held on to earlier gains versus the dollar after Sunak’s statement. Gilts and swap markets will re-open on Thursday morning.
The pound has outperformed all of its Group-of-10 peers except for the dollar this year. The currency strengthened earlier on Wednesday after a report showed inflation slowed less than expected in April, threatening to delay interest-rate cuts from the Bank of England.
A Bloomberg survey of investors last year found a Labour victory in an election would be the best results for UK stocks and the pound.
(Adds confirmation of July election in second paragraph and context on pound volatility from fifth paragraph.)
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