Sterling steady vs dollar, hovers near 2-year high against euro

LONDON, Sept 24 (Reuters) – Sterling held steady against the dollar and hovered near a two-year high against the euro on Wednesday, with investors focusing on the UK economy and rate expectations again after staying away in recent weeks on political uncertainty.

Bank of England Governor Mark Carney is set to speak in Wales on Thursday and he could reiterate that interest rates will be raised in the spring of 2015. With the Scottish referendum out of the way, traders said one more obstacle to a rate hike has now been removed.

Sterling was steady against the dollar at $ 1.6385, well above the 10-month low of $ 1.6052 struck just days before the Scottish referendum. The euro was flat 78.44 pence, not far from a two-year low of 78.10 pence struck after Scotland voted to stay in the union late last week.

Traders said the overall tone was cautious, given the uncertainty over constitutional changes that the Scottish vote triggered. As the general elections approach in May, a debate regarding providing more powers to Scotland in combination with changes to English MPs only voting on English issues is set to take centre stage.

In other words, if the opposition Labour Party forms a national government in 2015 with the support of non-English MPs, it could face major problems passing legislation applicable only to England if it had no majority amongst lawmakers from England.

Until there is more clarity, sterling will struggle to make much headway, analysts and traders said.

“Once it is clear what kind of independent political power Scotland will be given and investors have finally received a clear time frame from the BoE for a rate rise, I see the potential for this pair to return to 1.70 by the end of the year,” said Jameel Ahmad, chief market analyst at FXTM.

Sterling’s gains are likely to be more pronounced against the euro. German business sentiment dropped for a fifth straight month in September to its lowest level since April 2013 keeping alive the prospect of further monetary easing by the European Central Bank.

In contrast, investors are expecting the BoE to tighten monetary policy early next year.

“We agree with February in terms of the date (of a BoE rate hike),” said Ian Winship, head of sterling bond portfolio at Blackrock (NYSE: BLK – news) .

“It’s a fair enough distance from the general election to be a political issue and you’ll also have had the February inflation report. In terms of market pricing, there’s about 65 percent probability of a 25 basis point rise price in. The focus after that will be the trajectory of policy normalization.” (Reporting by Anirban Nag; Editing by Hugh Lawson)

Scottish honeymoon a short-lived affair for the pound

By Patrick Graham

LONDON (Reuters) – Sterling’s rebound on Scotland’s rejection of independence on Friday lasted all of about two hours before the realities of the UK’s still-complicated political horizon reined in what had until recently been the world’s best performing currency.

The pound’s exchange rate continues to outperform a weakening euro, where ongoing monetary easing by the European Central Bank contrasts starkly with speculation of UK interest rate rises early next year. But its swift retreat against the U.S. dollar on Friday was more indicative of the doubts.

There are just eight months to go until Britain’s parliamentary elections and investors are concerned that London’s effort to win the Scottish vote has left an awful lot of difficult business to attend to beforehand.

Prime Minister David Cameron’s ruling Conservatives, along with their Liberal Democrat coalition partners and opposition Labour party, have pledged a constitutional overhaul that will deliver more spending powers to Scotland and examine what, if anything, the rest of the UK’s regions should get in turn.

What’s more, there’s the added uncertainty of Cameron’s promise of a referendum on European Union membership if the Conservatives are returned to power next Spring.

“Even though the voters in Scotland have decided to stay as part of the Union, do not expect that to be the end of it,” said Neil Birrell, Chief Investment Officer with Premier Asset Management in London.

“The supporters of independence will continue to press their case and there will be fundamental changes to the political landscape. It is possible that overseas investors, whether they are financial, personal or corporate will alter their view of the UK as a good place to keep their money and sell UK assets.”

PREMIUM

It’s less easy to pin down exactly what sort of political premium investors will charge – or should charge – for holding sterling as a result.

The event risk from the Scottish vote has been fairly clear. The pound fell around 2.5 percent against a basket of currencies after the first poll indicating a surge for the “Yes” campaign two weeks ago and the rebound has been similar. Dutch bank ING put the UK breakup risk at 2-3 percent.

But at the same time, taking out the past two weeks, sterling has done no better than the euro in the two months since the dollar launched a march higher that many banks expect to last for years.

“I would hesitate to allocate a percentage, but I would certainly say that the political premium for sterling is now larger,” said Jane Foley, a strategist with Rabobank in London.

“Politics have become more important, more emotional, after the events of the past two weeks and with the general election on the horizon that will not fade.”

A number of banks were calling on Friday for the pound to fall back to $ 1.60 in the short-term. It fell a third of a percent on the day to $ 1.6358. Most were more positive on its prospects against the euro, against which the pound is within a penny of its highest levels since the 2008 financial crisis.

Reuters last currency market poll early in September put the pound at $ 1.67 in one, three and six months and $ 1.65 in a year, as well as at 77.4 pence per euro in six months and just 76.1 pence in a year.

RATES

At the heart of sterling’s gains of up to 15 percent over the past year have been expectations that interest rates would rise before next May’s elections and debt markets continue to price in a rise in the first quarter of next year.

But Foley is among a growing group on markets who are prepared to question the wisdom of the Bank of England, led by Governor Mark Carney, raising interest rates at all.

Inflation is below the Bank’s target, real wages are falling, another fiscal blow to demand is planned post-2015 and, possibly most influentially, growth continues to disappoint in the euro zone – its main trading partner.

“Is Carney really going to raise interest rates when the figures from the euro zone are so bearish and when inflation is so low?” Foley says.

“The Scottish vote was the trigger, but I think markets would have pulled in their pricing for a rise in rates anyway.”

Money market pricing points to a move in official rates before the elections and there are some heavyweight voices, bullish on both the dollar and the pound, calling for a rise in rates before the end of 2014.

“It should be a return to business as usual for the UK,” said Bill O’Neill, Head of the Investment Office at UBS Wealth Management in London.

“Leading indicators still point to the economy growing strongly in the second half of this year, unemployment should fall further and wages should start to rise. This should be enough (for) the BoE to raise rates in the fourth quarter.”

Sterling’s underwhelming reaction to Friday’s events suggest the market, overall, may not be so confident as those sort of bullish forecasts suggest.

(Additional reporting by Anirban Nag; Editing by Andrew Heavens)

Euro Struggles As Fed Moves In Opposite Direction From ECB

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The euro plummeted on Wednesday after the Federal Reserve’s monthly policy meeting served as a reminder that the US central bank is moving in the polar opposite direction from the European Central Bank.

On Thursday, the common currency steadied at $ 1.2878 as investors anxiously awaited the results of Scotland’s referendum vote.

On Wednesday, the Federal Reserve maintained its cautiously optimistic tone, saying that the decision to raise interest rates will depend heavily on economic data and whether or not it indicates that the US economy is ready to stand on its own.

The bank said its quantitative easing package will end in October, but did not provide an exact timeline for an interest rate hike. The bank elected to keep its forward guidance consistent, saying that rates will remain low for a “considerable time.”

Related Link: What The FOMC Statement Means For Your Portfolio

The Wall Street Journal reported that Fed Chair Janet Yellen was vague about the bank’s plans for a rate hike at her press conference following the meeting, but stressed the importance of using economic data to help determine the correct timing for the rate increase.

Moving forward, investors will be watching the UK as Scotland heads to the polls to decide whether or not the country should remain a part of the UK or have its own independence.

Recent polls have shown that independence supporters have lost some ground, but nearly 10 percent of the country’s population remained undecided. British Prime Minister David Cameron has warned that Scotland will no longer be allowed to use the pound if it becomes independent, something that many believe could be enough to persuade voters to vote the referendum down.

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Bets against pound, hedging costs escalate on Scotland nerves

(Adds quote, details)

* Sterling/dollar 2-week implied vols rise to 12 percent

* 1-mth vols higher than 2-month, showing near term concerns

* Pound hits 10-month low vs dollar, 3-1/2-week low vs euro

* Rate hike expectations pushed back on Scotland uncertainty

By Jemima Kelly and Anirban Nag

LONDON, Sept 8 (Reuters) – The cost of hedging against near-term currency swings jumped on Monday, with the options market showing its greatest bias for sterling weakness in more than two years, as concerns grew over a possible “Yes” vote in Scotland’s independence referendum.

With just ten days to go before the vote, a YouGov survey for the Sunday Times newspaper put the “Yes” to independence campaign narrowly ahead at 51 percent against the “No” camp at 49 percent, overturning a 22-point lead for the unionist campaign in just a month.

That prompted investors to pull out from the pound, dragging it to a 10-month low of $ 1.6104. It recovered slightly to $ 1.6142, still down 1.2 percent on the day and more than 10 cents below an almost six-year high hit eight weeks ago.

The pound is centre-stage in the heated debate over Scotland. Pro-independence leader, Scottish First Minister Alex Salmond says Scotland will share the pound, but Westminster has ruled that out, leading to uncertainty about the currency, debt and sharing of North Sea oil revenues.

Until late last month, most investors have been factoring in only a slight chance that Scotland would vote to split up the three-century-old union with the rest of the United Kingdom.

But with polls now indicating that Scotland could be on the verge of independence, investors seem to be getting nervous.

“It’s very difficult for anybody to predict exactly what the course for Scotland is on a ‘Yes’ vote,” said Jane Foley, a senior currency strategist at Dutch lender Rabobank.

“On a ‘No’ vote, this is a storm in a teacup and volatility will disperse, but on a ‘Yes’ vote, I think volatility in sterling markets will be heightened for some time.”

Uncertainty over the future of Britain and its currency, which has shed almost 3 percent in the past week against the dollar, saw the cost of hedging against near-term currency swings rise. Monday’s jump in implied volatility, especially near term, puts it on track for its biggest rise since just before the 2010 general election.

Two-week sterling/dollar implied volatility – straddling the date of the vote – has tripled, rising to trade at 12 percent on Monday, traders said.

The one-month implied volatility for sterling/dollar rose to almost 9.6 percent, its highest since July 2013.

The two-month implied volatility also rose, but much less than the one-month and was trading at 8.15 percent, highlighting concerns about the fallout from a potential “Yes” vote in the short term.

“It is the near-term fallout that is leading hedge funds to seek protection,” said an options trader at one UK bank. “The longer-term investors – the real money investors – have so far been on the sidelines.”

SKITTISH ON SCOTLAND

Sterling was also down more than 1 percent against the euro. The single currency hit a 3-1/2-week high of 80.37 pence, before retreating to 80.17 pence.

Until early August most investors were bullish about the pound, given solid UK economic data and expectations that the Bank of England would be the first major central bank to lift interest rates from record lows.

But those expectations were pushed back on Monday to the second quarter of 2015, with analysts citing uncertainty around Scotland.

One-month sterling/dollar risk reversals, measured in vols – a gauge of demand for options on a currency rising or falling, were showing their highest bias for sterling weakness against the greenback in more than two years, trading at 1.8 vols in favour of sterling puts, or bets the pound will weaken.

One-month euro/sterling risk reversals, which flipped to show a bias for sterling weakness against the euro last week were also showing a greater skew for further pound losses and euro gains.

To put that into perspective, the moves came despite the fact that the euro has been under pressure since the European Central Bank cut rates to new record lows and launched a large-scale asset purchase programme last week.

(Editing by Louise Ireland)