The UK General Election is being held on Thursday 7th May. The opinion polls cannot split to the two main parties, the Labour Party and the Conservatives. This means that financial markets have very little idea as to the make up of the next government of the UK. Markets tend not to like uncertainty. Any number of permutations could occur. The main problem being either a Labour-led minority government that is required to panda to the anti-austerity Scottish Nationalist Party; or the Conservative-led government which could open the door to an EU referendum and a potential “Brexit”. Either way could be bad for sterling, but as yet the markets have been fairly relaxed. However, history around these crucial votes suggests we should be prepared for sizable sterling volatility in the next few days.
On Monday, the cost of purchasing protection to guard against big swings in the price of sterling moved above where it was trading in September 2014 and to its highest level since May 2010.
These two dates are key events in the UK’s recent history:
So, measured in the currency options market, the one-week sterling/dollar implied volatility option for expiry on 12th May is more expensive than during the last great volatility event for the UK, the Scottish Independence Referendum. It is also the most expensive since the last UK General Election.
The options market was right to be concerned during these two events. The day of polling on 6th May 2010, Cable had a daily range of 438 pips, with the day of the results (on 7th May 2010) showing another 460 pip range day. Similarly, on polling day for the Scottish Independence Referendum on 18th September Sterling/Dollar had a daily range of 164 pips, whilst in reaction to the result a day later, Cable had a 242 pip daily range.
This chart shows the impact on Cable in May 2010 on the day of the UK General Election and also the day after which provided the results:
The chart below shows the impact that was seen around the polling day of the Scottish Referendum and also the results, a day later:
Both these events were clearly very volatile for Sterling, and looking at the options market, traders are preparing themselves for similar volatility this week. Forex traders should certainly be mindful of this when looking to trade Cable this week.
Oh and just for good measure it is also Non-farm Payrolls Friday this week too…