© Reuters. FILE PHOTO: Wads of British Pound Sterling banknotes are stacked in piles at the Money Service Austria company’s headquarters in Vienna, Austria, November 16, 2017. REUTERS/Leonhard Foeger/File Photo

By Joice Alves

LONDON (Reuters) – Sterling/dollar implied volatility, a gauge of expected swings embedded in currency options, rose to a seven-month high around 7.9% on Wednesday, as soaring energy prices and a surge in bond yields hit the pound.

That’s well above volatility levels seen on most other developed currencies – euro one-month implied volatility rose on Wednesday to three-month highs, but is still at 5.5%.

“The surge in cable (sterling/dollar) volatility highlights the uncertainty which is currently encapsulating the pound,” said Jane Foley, head of FX strategy at Rabobank London.

Soaring energy prices encouraged investors into the dollar, pushing it close to the one-year high touched last week against a basket of currencies. That knocked sterling 0.4% lower to $1.3565. by 1030 GMT, though it stayed away from the lows hit last week, when it plumbed the lowest since December 2020.

It weakened 0.1% versus the euro at 85.04 pence on Wednesday, having last week hit a two-month low around 86.5 pence.

The prospect of imminent rate hikes, signalled by the Bank of England, was not enough to support sterling, Foley said.

“Higher yields and a hawkish BoE Governor have not been sufficient to convince investors that GBP is a buy, instead it would appear that stagflation is a bigger concern,” Foley said.

Britain’s supply chains for everything from pork, petrol and poultry to medicines and milk have been strained by shortages of labour.

Wholesale gas prices soared to record highs in several contracts on Tuesday amid wider energy market price hikes, ongoing supply concerns, colder weather forecasts and a cut in French nuclear generation due to a strike.

Markets currently price a roughly 90% probability of a 15 basis point rate rise in December and gilt yields have surged, with the 2-year yield touching 0.518%, its highest since February 2020.

Some analysts said, however, that the rate rise expectations were shielding the pound from a bigger fall even as most riskier market segments sold off.

“Even though that tightening may ultimately be a policy mistake it looks far too early for that to hit GBP,” said ING analysts in a research note.

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