The pound is back to trading on fundamentals
Divyang Shaw on the currency’s future after the referendum.
GBP volatility started to fall Thursday on growing prospects of a “no” vote in Scotland’s independence referendum. The follow-through Friday morning has taken cable’s implied curve back to more normal levels.
How do we measure normality?
Well we can look at how 1-month cable vols are trading relative to 1-month EUR/USD – the spread here has gone back to levels seen before the rally on cable vols earlier this month.
We can go back to trading on fundamentals where:
1) expectations on the first rate hike for the BoE and Fed will keep cable volatile and,
2) the ECB’s desire to expand its balance sheet will keep EUR weak against the USD and GBP.
With the Scottish vote out of the way attention will turn to the May UK elections, the potential uncertainty and its impact on the BoE. While expectations are high for the BoE to hike in Feb 2015 it is worth keeping in mind that the last time interest rates went up six months before an election was in 1955.