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Sterling volatility heightened by data & Labour lead

by Ashraf Laidi

Sterling hit fresh five-month lows on a combination of market-unfriendly election opinion polls and a fresh round of disappointing economic data.

Sterling’s one-month option volatility vs the US dollar – a reflection of fear – broke above the 2011 highs to hit the highest level since the 2010 general election.

UK industrial production rose 0.1%in the year ending in February, the weakest since August 2013, days after the UK trade deficit rose to five-month high.

Opinion polls damage sterling

After most opinion polls have put the Conservatives ahead of Labour by one percentage point over the past two weeks, three polls on Thursday pointed to Labour leading ahead of the Conservatives by as many as six points(ComRes poll) and four points (YouGov poll).

Interestingly, the second leg of the yesterday’s selling wave in GBP/USD began at approximately 8:00 London time/BST, coinciding with the publication of an FT online article about election uncertainty starting to weigh on the pound. The article was published in the midst of a generally positive environment for the currency as the majority of polls showed Conservatives ahead of Labour. Yesterday’s FT piece was the first to show Labour ahead and it was swiftly picked up by traders.

Sterling volatility overtakes Scottish Independence, Eurozone crisis

Notably, one-month option volatility on GBP/USD –a measure of GBP volatility — has risen to its highest level since June 2010, exceeding the highs during of the Scottish Independence referendum uncertainty in September and during the heightened Eurozone selloff in summer 2011. Not only their exist the potentially lose-lose situation for sterling from the EU referendum implications of a Conservatives win, but also the market repercussions of an SNP-backed win for Labour.

GBP/USD may be on its way to post four consecutive negative quarters, which was last seen 10 years ago. As the pair hits five-year lows and the lose-lose scenario weighs on the currency, $1.4250 may well be on the cards.

GBPUSD-1-mth-option-volatility-April-10-2015

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