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After initial spike, sterling volatility drops to two-week low

Theresa May’s gambit to call early election might have backfired spectacularly and cast a cloud of uncertainty over the upcoming Brexit negotiations – but the currency markets don’t necessary see it that way.

While the pound is still visibility shaken and trading down 1.5 per cent against the dollar, the one-month implied volatility on the currency — a gauge of how much money investors are willing to pay to insure against the sterling’s swings over the next 30 days — has actually dropped to a two-week low.

After initially spiking to 10.34 per cent last night when exit polls results were published, volatility has retreated sharply to around 8.10 per cent. That’s the lowest since May 26 and is a stark contrast to the move seen in the wake of last year’s Brexit vote, when the gauge surging to a record year high of 32.1 per cent.

Analysts at Nomura said a hung parliament is not necessarily a bad thing for the pound and reckon it could recover from today’s sell-off in the coming weeks.

Sterling would initially suffer from a hung parliament. But, if a Labour coalition were formed, it may be wise not to underestimate the impact of “Softer Brexit” hopes.

The muted response to the shock UK election results can also been seen in the capital markets. Sterling corporate bond prices were little changed on Friday morning, with food services company Compass pushing ahead with plans to market new sterling bonds.