One-month cable implied volatility jumped half a percentage point Monday to stand at 8.8%, up from 8.3% the same morning. The leap came on the back of an announcement by the U.K. Treasury that sterling needs to weaken in order for the U.K. to enter the European Union, according to a New York-based trader.
Volatility on the currency pair was closely tied to the spot market, which saw sterling fall to USD1.64 against the greenback immediately after the announcement, from USD1.66 on Monday morning, said the trader. Later statements by Gordon Brown, chancellor of the exchequer, that the U.K. is not ready to enter the euro helped subside pressure on sterling, which strengthened to USD1.66 Wednesday, close to where it had traded the previous week, he noted. Option volatility also retraced, hitting 8.6%. This was, however, still higher than the 8.3% level it was trading at in the previous week, he added.
With a perception that sterling will continue to strengthen against the greenback a popular trade is to buy a three to six month sterling call/dollar put, said the trader, predicting that the currency could go as high as USD1.72 in the coming two months.
Robert Lynch, foreign exchange strategist at BNP Paribas in New York, said the dollar is likely to stabilize and make some recovery against the other major currencies. Statements that sterling needs to weaken are jumping the gun considering that the U.K. will not be joining the euro anytime soon, he noted.
Cable Spot & One-Month Implied Volatility
