Sterling volatility rises as UK polling day nears

The UK general election was making its presence felt on the currencies market on Tuesday, as a gauge tracking demand for protection against swings between the pound and the euro touched its highest level since May 2010.

One month sterling/euro implied volatility reached 12.31, just two sessions before polling in the UK's most closely-fought general election in a generation.

The rise in the gauge - which reflects moves by traders to buy insurance against potential instability in the currency markets - came as sterling showed signs of volatility on Tuesday.

The pound went as low as $1.5101 against the dollar, before rebounding to reach a day-high of $1.5151, moving up from the lower end of the range to its top in just under 90 minutes. It then settled to trade flat on the session at $1.5121.

Meanwhile, one month sterling/dollar implied volatility touched 12.725, setting it back toward the 12.85 peak it reached when the duration of the contracts first rolled over to reach dates coming after polling day on Thursday.

"We identify downside risks to sterling with either party [Conservative or Labour] leading the government," said Sam Hill, senior UK economist at RBC Capital Markets.

"On the economy the divergence between plans for the speed of deficit reduction are such that a Labour government could borrow more than double what is planned by the current coalition government over the next five years."

Craig Erlam, market analyst at Oanda, said: "I'm sure we'll see much more of an impact as we approach any EU referendum, should David Cameron remain in Number 10 Downing Street.

"Sterling has been out of favour over the last few trading sessions, which is not that unusual as we near such an uncertain election. The sell-off hasn't been quite as aggressive as many anticipated."

The yield on the UK's 10-year benchmark sovereign debt was rising on Tuesday, the first full trading session of the week in London after a public holiday.

It was up 3.9 basis points at 1.88 per cent. The increase came as government debt yields at the core of the eurozone were falling, with Germany's 10-year Bunds down 2.9 basis points at 0.42 per cent and the yield on France's debt over the same period down 3.3 basis points at 0.76 per cent.

Stock markets were looking more sanguine. The FTSE 100, London's main equities index, which features a range of international constituents, was 0.5 per cent higher at 7.017.08. The FTSE 250, seen as more representative of the domestic UK economy, was flat at 17,468.27.

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