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Expectations for pound volatility muted ahead of UK election

Smooth sailing ahead?

Investor expectations for volatility in the UK pound and other British assets remained muted ahead of Thursday’s election in stark contrast to the palpable worry before the Brexit vote.

Implied sterling volatility over the next month traded on Wednesday at 9.07 per cent, up modestly from lows of the year around 6.5 per cent, according to Bloomberg data.

The gauge tracks activity in options, which are used to hedge against or speculate on moves in the currency. It had shot-up to almost 30 per cent before the UK referendum last June on whether the country should part ways with the EU.

Underscoring the muted expectations, Goldman Sachs analysts note that one-month implied volatility for the pound is running at the 28th percentile since the start of 2016. Investors do not expect much in the way of equities market volatility either, with FTSE 100 implied volatility in the 17th percentile.

“What does the market appear to be pricing in the way of moves in UK asset prices around the event? Not much”, the Goldman analysts note.

Derek Halpenny, European head of global markets research at Bank of Tokyo-Mitsubishi UFJ, points out that currencies traders are working on the “assumption of a Tory victory”. But he warns that “any surprise out-performance for the opposition Labour Party will result in a much greater downside move than an upside move on a stronger showing for the Conservatives”.

The results will first be broadcast during a time of low liquidity in the foreign exchange market, something that could also exacerbate tumult if there were an outcome that surprised traders, Mr Halpenny said.