If markets were relaxed about Brexit over the summertime, they are less so now. The vacation had left analysts puzzled by comparatively low sterling volatility, given the dearth of Brexit progress in the run-up to the March 2019 exit date, but anxiety levels have accelerated since the outset of September.
Sterling-dollar one-month implied volatility - the cost of hedging against sterling swings against the dollar - is on the upswing and at its loftiest level in six months. True, the level is some way below this year’s mid-February peak, but what looks clear is that after months of indifference, investors are on alert for Brexit developments.
With the UK pound kicking off September on a melancholy note, slipping against its major counterparts, as last week’s Brexit optimism morphed again into angst. Sterling dropped 0.8 percent against the US dollar to $1.2858, marking its worst slump in a month. The fall was worse against the euro, with the UK pound off 0.85 percent at €1.1072.
The recent fall comes after Michel Barnier, the EU’s lead Brexit negotiator, said he “strongly” disagreed with major portions of the UK’s Brexit proposals. Theresa May, the British prime minister, held her ground saying that the UK would not “be pushed into accepting compromises on the Chequers proposals that are not in our national interest.”
Only recently, the pound was boosted above $1.30 after Mr. Barnier said the EU was “prepared to offer a partnership with Britain such as has never been with any other third country”. In addition to the political disunity, investors also studied through a disappointing survey of Britain’s manufacturing sector. With industry executives saying growth slowed down last month to the weakest level in 25 months.
The purchasing managers’ index was likewise dragged lower by export orders which contracted for the first time in two years to reach the weakest level since the fourth quarter of 2014. With the summer ‘no-deal’ Brexit rhetoric weighing on sentiment for manufacturing activity, the only thing that can be expressed with a fair degree of certainty is that politics is now the driver of sterling.
Written by Scherzando Karasu, External Financial Journalist
DISCLAIMER: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 80% of retail investor accounts lose money when trading CFDs with us. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money. The thoughts and opinions expressed here are solely those of the writer and do not necessarily reflect the view of ActivTrades PLC. This commentary is for information purposes only and should not be considered as investment advice. The decision to act on any ideas and suggestions presented is at the sole discretion of the reader. ActivTrades PLC is authorised and regulated by the Financial Conduct Authority, registration number 434413.