Pound volatility climbs as Tory leadership race comes into focus

Athens: Traders are starting to bet on swings in the pound next month as the race to replace UK Prime Minister Theresa May kicks off.

The Conservative Party leadership contest has caught the attention of options traders as May’s successor is likely to define the course of Brexit.

With May expected to agree a timetable for her own departure in June after a final attempt to get her Brexit bill through Parliament, buying protection against currency swings is getting more expensive.

“It likely reflects more political uncertainty in the UK,” said Lee Hardman, a currency strategist at MUFG Bank Ltd. “If the withdrawal agreement fails to pass again, as appears likely, then it is likely to fire the gun on the process to change the Conservative leadership.”

The pound was the most volatile currency among peers for most of this year, before bets on short-term swings collapsed last month after the European Union pushed back the Brexit deadline until October. Volatility is now picking up again, with a gauge of one-month implied swings leading gains to a two-week high of 7.73 per cent.

The pound is treading water below $1.28 after sliding more than 2 per cent last week, the most since October 2017, as the possibility that May’s successor could push for a harder split from the EU weighs on sentiment. Traders will next be watching the outcome of Thursday’s European parliamentary elections, to see the strength of Nigel Farage’s Brexit Party.