Pound traders braced for more political turbulence
Risk of Britain's exit from the EU and other constitutional issues in the wake of recent election results are likely to fuel price swings in the unit
No sooner have traders in the British pound got past the Scottish independence referendum than the potential for more political upheaval is being thrust upon them.
Recent electoral successes for the UK Independence Party, and speculation that it may hold the balance of power after the national elections in May next year, are forcing traders and strategists to take more seriously the possibility of Britain's eventual exit from the European Union.
A measure of anticipated price swings in the pound during the next 12 months has jumped since October 9, when the independence party gained its first elected national lawmaker and came second in another by-election. That contrasts with the past month, when the pound's volatility declined more than that of any other Group of 10 currency.
"Currencies don't like political uncertainty," said Neil Jones, the head of hedge fund sales at Mizuho Bank. "The election will be very tight and so there'll be lots of need to hedge." He added that volatility would be supported "through the election".
The Conservative Party, part of Britain's ruling coalition, has promised a referendum on EU membership by 2017 if it wins a parliamentary majority in May. The independence party, led by former commodities trader Nigel Farage, wants Britain out of the EU and is campaigning for an earlier vote.
While the past week's global market turmoil may be responsible for most of the increase in the pound's price swings, a growing number of strategists say EU membership will be an issue that could hang over the currency for years.