Investors are preparing for continued volatility in the value of the pound following discussions between Prime Minister Boris Johnson and European Commission President Ursula von der Leyen regarding Brexit.
The overnight sterling implied volatility gauge, which is at its highest level since March, predicts further jumps and swings in the coming weeks as the Brexit transition period comes to an end.
Although the pound has risen against the euro, it has fallen against the US dollar, however, this could change rapidly.
On the 16th of December, sterling ended at $1.337, up 0.15%, but had been a cent higher at lunchtime. Against the euro, sterling is currently at €1.108, up nearly half a eurocent.
Compared to call options, the cost of purchasing options that pay out if the pound falls (known as put options, which allow for the sale of sterling at a certain price) has increased.
The GBP/USD 1-month implied volatility has risen towards 13%, while the 10-delta options have become 5.5% more expensive for puts over calls – approaching levels seen during the pandemic lockdown turbulence in March.
The market is reflecting the current uncertainties surrounding the tense negotiations between Johnson and von der Leyen and the fear of a standoff.
Johnson informed MPs that with or without a free trade deal with the EU, the UK would “prosper,” and controversial sections of the internal markets bill were removed, which was well received by politicians and investors as it reduced uncertainty and potential issues surrounding Northern Ireland.
However, major uncertainty remains, with Irish Prime Minister Micheal Martin stating that the two sides are “on the precipice of a no-deal,” and Johnson accusing the EU of wanting to “punish” the UK.
Whether there is a breakthrough or a breakdown, the ongoing discussions are likely to have a significant impact on sterling and should be closely monitored by those with an interest in the currency markets.