Traders Are Preparing for Volatility

Investors and economists are betting the Bank of England will increase its key rate a quarter-point when it meets later Thursday. Still, decisions in the past 24 hours by the US Federal Reserve and the Swiss National Bank have raised the possibility that an even more significant hike could be on the table.

Pound volatility cooled from its peak on Wednesday in the wake of the Fed’s 75 basis-point rate increase; still, demand for one-day options to hedge against swings remains high. Options gauges suggest the UK currency could sink below $1.20 if BOE’s decision disappoints pound bulls.

According to You-Na Park-Heger, a currency strategist at Commerzbank, a surprise half-point hike can’t be ruled out.

BOE Set for Steady Rate Hikes Amid Global Chaos: Decision Guide

Central banks worldwide are struggling with the dilemma of taming surging inflation while also managing risks to economic recovery. The UK’s gross domestic product contracted in recent months. It could lose momentum as workers remain outside the labor market, and price pressures constrain businesses.

The pound traded 0.7% lower at $1.2090 as of 9:38 am in London. Money markets are pricing around 34 basis points of tightening Thursday; this indicates that a quarter-point hike is fully priced with some hedging for a more significant increase.

Risk reversals, a barometer of market positioning and sentiment, show bearish wagers dominate as demand for dollar exposure increases with the Fed poised to deliver another big hike at its next meeting.

Bond Market Losses Just Beginning as Fed Sets Path to 4% Yields.