The pound held steady on Wednesday, recovering some stability after an intensely volatile week that has been dominated by safe-haven flows on the back of violence in Israel and by a sudden shift in expectations for interest rates. Sterling is nudging at three-week highs against the dollar and the euro. The rally has been down, in part, to investors re-evaluating their expectations for U.S. interest rates and for the outlook for euro zone growth, rather than down to any standout UK-centric factor. Implied volatility – a measure of how traders price an option – shot to a high of 8.56%, the most since 8.7% on July 24. These options expire after the Bank of England’s next policy meeting on Nov 2. Investors have turned mildly bearish on the pound for the first time since April, having amassed their largest bullish position in sterling since 2014 just a few weeks ago.
“A slowing UK economy has hurt the pound, especially against the U.S. dollar, which has benefited from a solid U.S. economy. However, any signs that UK growth is improving could prompt speculative positioning to be reassessed – moved to minor shorts last week just a few months after longs hit the highest since great financial crisis in July,” DailyFX strategist Manish Jaradi said.