Pound traders have to get used to new reality as rapid currency moves become the norm
Published 16/10/2016 | 02:30
It's been a tumultuous two weeks for the pound, and all indications are that traders will have to get used to the volatility. The UK currency is getting harder to trade, and to predict, because the nation's vote to exit the EU has changed the rules of engagement.
Whereas before June 23 it was enough for investors to track the economy and Bank of England (BOE), now they have to follow, and react to, the political twists and turns of Brexit.
With new developments dripping out on an almost daily basis, the pound's tumble has been marked with wide fluctuations, with its average daily trading range this month about 70pc more than in the year before the referendum. A measure of anticipated price swings for sterling is climbing faster than for any other major currency.
"It's one thing to try and model an economic outlook, but when we're trying to work out what the politicians are going to do, it's impossible," said Jane Foley, a senior currency strategist at Rabobank International in London.
"Therefore it's very likely that we'll have markets reacting to headline news and we'll have volatility. The warnings about Brexit are coming to fruition, and this week has marked a sea change in market sentiment." From Tesco's price dispute to the High Court action to stop the government unilaterally triggering Article 50, the political and economic noise that's so perturbing markets isn't going away anytime soon.
Sterling weakness "has much more to go," said George Saravelos, global co-head of foreign-exchange research at Deutsche Bank in London. "Indeed, our aggressive forecasts," for the pound to fall about 6pc by year-end, he said, "may still be under-stating the level of weakness required".