British Pound: Sterling supported as yields retrace – MUFG

MUFG’s Derek Halpenny highlights that implied volatility in GBP/USD has barely moved after Nigel Farage’s decision to resign and recontest his Clacton seat, calling the by‑election a sham with potential further votes if he is sanctioned. He stresses that GBP volatility is more tied to incoming PM Andy Burnham’s economic stance, with lower 10‑year Gilt yields, contained fiscal worries and weaker UK inflation supporting the Pound as a top G10 performer.

Politics, yields and Pound performance

"Finally, there has also been limited changes to implied vol level in GBP/USD on the back of the announcement from Nigel Farage that he will stand down as MP for Clacton but then contest the same seat in the by-election. This was to protest the investigations by the parliamentary standards committee into his finances on concerns he breached parliamentary rules."

"This will result in the investigation being suspended but if he wins (or loses) the investigation will restart. None of the other major parties are planning to contest the seat meaning this by-election will turn into something of a sham."

"GBP volatility is more aligned to incoming PM Andy Burnham’s expected economic policies and for now fiscal concerns remain contained. 10-year Gilt yields have retraced more notably lower from the recent peak (15th May) than in the US, Germany and Japan helped by the UK’s weaker inflation pick-up that is also helping to improve investor confidence and support the pound."

"If there is a G10 currency where yield spread continues to play less of a role in driving FX it’s the pound, which is the top performing G10 currency since the Middle East conflict began at the end of February."