Sterling rallies but remains the 'world's most volatile major currency'

“It’s been some rollercoaster ride for the pound this week,” said Viraj Patel, strategist at Vanda Research.
Sterling rallies but remains the 'world's most volatile major currency'

“Sterling remains vulnerable,” said Gareth Gettinby, an investment manager at Aegon Asset Management.

The pound is poised to end the week as the world’s most volatile major currency, whipsawed by the UK government’s radical fiscal plans and the Bank of England’s effort to stave off market panic.

The turbulence has pushed a gauge of its historical volatility this week, the most among major currencies tracked by Bloomberg, eclipsing the level on notoriously skittish peers such as the Norwegian krone and Brazilian real. 

Traders remain on edge as they grapple with the violent price swings. The currency rallied from a record low of less than $1.04 on Monday to over $1.12 on Friday, buoyed in part by the Bank of England' pledge to stave off a collapse in the UK bond market.

The fundamental backdrop for the currency remains gloomy, as more expansive fiscal stimulus risks fanning inflation and weakening public finances. But sentiment is already so bearish and positioning stretched, investors are loath to rule out the risk of another pop higher.

“It’s been some rollercoaster ride for the pound this week,” said Viraj Patel, strategist at Vanda Research. “The pound will be a battle between short squeezes and speculators wanting to chase a move toward parity.” 

For now, it looks like the British government will remain unwavering on its fiscal plan, which includes the largest package of tax cuts in half a century. Despite calls for the government to release the fiscal watchdog’s forecasts early to help quell market nerves, the Treasury said there was no plan to accelerate its publication earlier. 

“Sterling remains vulnerable,” said Gareth Gettinby, an investment manager at Aegon Asset Management. “However, many investors have already sold sterling and positioning is very extreme. As such, I think volatility will remain elevated with a lot of choppy action." 

In a turnaround from the record lows the pound struck on Monday in reaction to the so called mini-budget fiscal plan, and helped by emergency Bank of England bond buying, the British currency rose to a one-week high on Friday.

It was heading for its biggest weekly rise in more than two years, but was still set for its second deepest monthly drop since October 2016.

Prime Minister Liz Truss and finance minister Kwasi Kwarteng met Britain's fiscal watchdog Office For Budget Responsibility, or OBR, and confirmed markets would have to wait until November 23 for independent economic and fiscal forecasts. Chris Turner, head of markets at ING said the government "still has to find a way to balance the books and avoid a very negative assessment from the rating agencies".

"A Conservative party conference this weekend suggests it is far too early for a U-turn on fiscal policy and, combined with a very difficult external environment, sterling should stay vulnerable," he added. 

Versus a weakening euro, hit by record high inflation in the eurozone, the pound rose to one week high before trimming some of those gains, and was up to 87.79 pence. 

Bloomberg and Reuters

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