Sterling volatility jumps as Britain goes to the polls

LONDON — Implied volatility in the pound has spiked on Thursday as Britain goes to the polls in an election that is projected to be much tighter than had initially been expected.

Polls published overnight suggest that Theresa May’s Conservative Party hold a lead of between six and eight points over Jeremy Corbyn’s Labour Party, although outliers suggest that lead could be as big as 13 points, or as small as one point.

The most important poll, however, will be released at 10.00 p.m. BST (5.00 p.m. ET) when the UK’s broadcasters release their jointly commissioned exit poll.

Until then, how Britain voted is anybody’s guess, and as a result, overnight sterling volatility — a measure of how much the British pound is expected to fluctuate — has jumped above 30%, hitting levels similar to those seen prior to the 2015 general election and ahead of the Scottish Independence referendum. 

That remains well below the 80% hit in the run up to the Brexit referendum last June.

Here’s the chart, courtesy of Reuters financial markets columnist Jamie McGeever:

What happens to the pound after the vote is still something of an unknown, and depends massively on how the UK votes. For example, a strong Conservative Party majority is projected by most forecasters as a positive for the pound, while a hung parliament — in which no party wins a majority of seats — is seen as the worst outcome. That’s because in a hung parliament there would be little to no certainty about who could form a government, and currency markets hate instability.

“A comfortable Conservative win probably would boost sterling to only $US1.30, given that it is the main scenario priced-in currently, and some hard Brexit risk will linger regardless of the size of the Tories’ win,” Samuel Tombs of Pantheon Macroeconomics wrote on Wednesday.

“By contrast, we think sterling could fall back to around $US1.26, if the Conservatives fail to win more than a handful of extra seats,” he added.

Opinions differ on what might happen to sterling in the event that Labour wins what pre-election opinion polls suggest is an unlikely victory. Some forecasters suggest that sterling could slump on the prospect of Jeremy Corbyn — whose policies would place punitive taxes on the City of London — as prime minister.

Tombs, however, argues that Corbyn’s less aggressive stance on Brexit could be a good thing for sterling.

“A surprise Labour win likely would boost sterling this time — in contrast to past precedent — due to the party’s softer Brexit stance. Labour’s manifesto promises to enter negotiations ‘… with a strong emphasis on retaining the benefits of the Single Market and the Customs Union’,” he wrote on Wednesday,

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