Pound Volatility Surges as Johnson and von der Leyen Head to Dinner

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On Wednesday, Sterling increased against a broadly week US dollar, after suffering from losses for three days, as British Prime Minister, Boris Johnson is heading to Brussels for dinner in a last-ditch attempt to make a Brexit deal with European Commission president Ursula von der Leyen. With only days left until the transition period for Britain comes to an end, traders are hoping that a face-to-face meeting between the European Union and UK leaders can break the current deadlock in negotiations. Marred with high volatility, this week saw the British currency fall on Monday to an almost three-week low. 

This was because leaders were unable to put their differences to rest in the broader talks for a trade deal, which increased the possibility of a no-deal Brexit. However, there was a glimmer of hope on Tuesday when Britain said that they would give up on clauses in domestic legislation that are against the Brexit Withdrawal agreement if they can reach an ‘agreement in principle’ with the European Union regarding a sticky negotiation point. There was a 0.5% increase in the British currency in volatile trading against the US dollar on Wednesday. In early London trading, it had reached $1.3433 in early London trading, which put it on course towards a two-and-a-half-year high of more than $1.35, which it had reached last Friday.

The sterling also increased by 0.4% against the euro to reach 90.27 pence, after it had declined on Monday to a seven-week low. However, it became apparent that the latest market moves were just a result of panicky trading because a measure of expected swings in prices i.e. the overnight implied volatility gauges increase to close at 25%. This is the highest they have been since March. Market analysts said that this increase in implied volatility indicates that people have lost confidence over the prospect of a deal being signed. 

With that said, after the recent selling pressure faced by sterling, some speculators have chosen to view the Prime Minister’s trip to Brussels positively. Therefore, they have decided to reduce short positions on the currency. Ahead of the dinner meeting scheduled in Brussels, one of the most senior Brexit-supporting ministers of Boris Johnson, Michael Gove spoke to BBC radio on Wednesday. He said that Britain believed there was a possibility of making a compromise on some of the sticky points in negotiation. 

Angela Merkel, the German Chancellor said that Britain and the European Union could still come to an agreement where a Brexit trade deal is concerned, but she did say that there was no way to promise that there would be a breakthrough on Thursday when the EU summit is scheduled to begin. Market analysts said that this was a now or never moment for the two parties and the meeting between the two leaders would tell a great deal about what can be expected in the future. Neither parties want to go with a no-deal Brexit because it would result in numerous complications.