Theresa May, the UK prime minister, bookended a volatile week for sterling, prompting a sharp rise in the cost of hedging against falls in the pound as she prepares to set out more information about her Brexit negotiating strategy.
The pound rallied against the dollar on Friday, at one stage rising 0.6 per cent to regain the $1.22 mark. But traders are positioned for sterling to fall, underlining how Brexit is back on investors’ agenda after a short period of currency stability.
The pound was on course to end the week 0.7 per cent weaker against the dollar, while heading for a 2 per cent drop against the euro and a 2.8 per cent decline against the yen.
Traders are gearing up for two important Brexit developments — Mrs May’s speech on Tuesday and the Supreme Court ruling on the government’s appeal on the High Court’s Article 50 ruling, which said ministers had to consult parliament before triggering the two-year EU exit process.
“The market is getting tired of this perception that the government may not yet have a plan,” said Jane Foley, FX G10 strategist at Rabobank. “The market wants to see something concrete. Signs that there isn’t yet a strong plan within the cabinet is now in itself becoming a negative factor.”
Similar frustration was evident in the US, where traders were this week selling the dollar after being disappointed by Donald Trump’s pre-inauguration press conference. “They want something concrete from Trump. They also want something concrete from Theresa May,” Ms Foley added.
After a fluctuating trading session on Wednesday driven by the impact of the president-elect’s press conference on the dollar, the pound once more weakened on Thursday after it was announced that the prime minister would next week make a long-awaited speech on her Brexit strategy.
That also created a spike in one-week implied sterling volatility, which measures demand for options to hedge against big currency swings over that period. It has risen from 11.2625 to 14.52, a two-month high.
Sterling was likely to head lower, said Kamal Sharma at Bank of America Merrill Lynch, but only in the short term.
Sterling, he said, “has finally awoken to the realities of Article 50 and we continue to believe that activation will be the crystallisation of Brexit fears and the final leg lower in GBP”.
However he added: “Providing the UK economy remains resilient, we see GBP recovering through the rest of the year as Brexit fatigue sets in, as a potential deal looks more ‘soft’ than ‘hard’.”