(Bloomberg) — The pound fell as David Cameron’s efforts to reach a deal with fellow European leaders over the terms of U.K. membership of the bloc entered a second day after hitting a stumbling block on Thursday.
As talks resumed Friday, expectations for price swings in the pound against the euro over the next six months climbed to the highest since 2011. With traders already pushing back bets on the timing of a Bank of England interest-rate increase, the prospect of a vote on leaving the world’s largest trading bloc is causing further concern, helping push down the pound against all of its Group of 10 peers this year.
U.K. Prime Minister Cameron had been aiming to seal a deal at the discussions, setting him up to announce a referendum for as soon as June 23 on his country’s place in the EU. With the possibility of negotiations dragging into the weekend, sterling headed for a fourth weekly slide against the euro.
“It’s likely we’ll still get something that gets us a referendum on this in June but that there will be enough questions within the agreement to encourage the ‘out’ camp,” said Kit Juckes, a global strategist at Societe Generale SA in London. “I can’t imagine it becoming clear who will win, so I’ve got another four months of uncertainty on the currency. Is the market now bearish enough on sterling? My bias is still negative.”
Leaders took “a few steps backward,” Italian Prime Minister Matteo Renzi said as the session broke up after 2 a.m. in the Belgian capital. Returning for fresh talks just before 11 a.m. Cameron told reporters that while progress has been made, “there’s still no deal.”
The pound dropped 0.4 percent to $1.4276 as of 12:53 p.m. London time, extending this week’s loss to 1.6 percent. It depreciated 0.5 percent to 77.85 pence per euro after reaching 78.98 on Feb. 11, the weakest since December 2014.
Six-month implied volatility for the pound versus the euro, a measure of price swings based on options, touched 12.12 percent, the highest level since October 2011.
Even as the pound declines, other British asset classes are holding up. U.K. government bonds are 2016’s best performing major securities in Bloomberg World Bond Indexes, while the nation’s stocks are outperforming other major European markets by declining at a slower pace than their peers.
Gilts advanced for a second day on Friday. The 10-year yield dropped five basis points, or 0.05 percentage point, to 1.40 percent. The price of the 2 percent security due in September 2025 rose 0.425, or 4.25 pounds per 1,000-pound face amount, to 105.355.
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