Sterling calm vs euro, overnight implied volatility soars to highest since March

Over in the derivatives market, however, sterling overnight implied volatility gauges rose to their highest since March at nearly 19%, reflecting traders' angst ahead of the U.S. election and expectations of near-term wild swings in the currency with Brexit negotiations undergoing and England jumping into full lockdown this week. "It's a bit of a perfect storm for the pound," said Neil Jones, head of European hedge fund sales at Mizuho.

Trading in the British pound was relatively calm on Tuesday as the currency stayed neutral against the euro and rose versus the broadly weaker U.S. dollar on the day of the U.S. presidential election.

Traders are waiting to see in which direction to take sterling as the post-election fate of the greenback will most likely partly govern the British currency. Another element which could take the pound swinging either way is Britain's imminent departure from the European Union. Over in the derivatives market, however, sterling overnight implied volatility gauges rose to their highest since March at nearly 19%, reflecting traders' angst ahead of the U.S. election and expectations of near-term wild swings in the currency with Brexit negotiations undergoing and England jumping into full lockdown this week.

"It's a bit of a perfect storm for the pound," said Neil Jones, head of European hedge fund sales at Mizuho. "There are three major factors of which the outcome is unclear - elections, COVID19, Brexit - and that's a solid backdrop for high volatility." "Market participants think, we're not sure what the outcome is, but chances are sterling won't stay where it is given these three major risk events," Jones said.

Brexit negotiations are continuing this week and investors remain hopeful that a deal setting up the future relationship between the two major trading partners will be struck in time. Some analysts expect a trade deal to be agreed this month. Opinion polls have consistently showed Democratic challenger Joe Biden leading President Donald Trump. Analysts said a Biden win could weaken the dollar as he is expected to spend big on stimulus and to take a freer approach to trade - boosting other currencies at the dollar's expense, including the British pound.

Sterling was last trading up 0.4% at $1.2964. It has risen by about 4% in the last six months as the dollar strength faded. Versus the euro, the British currency was flat at 90.09 pence, losing nearly 3% against the currency in the last six months. Sterling fell the day before on worries the newly imposed national lockdown in England to stop the spread of the new coronavirus will take another hard hit at the British economy and its finances.

Britain's financial watchdog said on Monday it would extend payment holidays on credit cards, car finance, personal loans and pawned goods before tougher coronavirus restrictions come into effect this week. British Prime Minister Boris Johnson said on Monday self-employed workers would receive government support equivalent to 80% of their pre-crisis profits during November's four-week lockdown in England, up from 40% previously.

 

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