Sliding sterling set for more turbulence

Sterling is losing ground to a less-than-mighty euro, let alone the broadly strong dollar. The pound could well slide further. But it's even safer to bet on high volatility. A sea-change in when traders expect the first Bank of England rate rise has helped drive sterling below $1.51 for the first time in nearly 18 months. British economic reports are undershooting expectations, whereas US and euro zone ones are exceeding them, Citi Economic Surprise indices show. The first UK rate rise is now expected in 2016, a far cry from the November 2014 hike which was pencilled in only six months ago. This means US rates are expected to rise before UK ones.
Also, political uncertainty is rife before May elections. The contest is hard to predict, not least because of the rise of anti-European and Scottish nationalist parties. Investors are all the more jittery because the outcome could call Britain's membership of the European Union into question. Little wonder that sterling has ceded 1 percent even against the euro since the start of the year.
The pound has scope to fall further, particularly against the unstoppable dollar. But it may be safer to bet on big swings rather than a relentless slide. Market rate rise expectations are prone to the sort of large lurches seen last year. Hints by central bankers that markets are out of synch with the BoE's thinking could therefore trigger huge gyrations the pound.
True, implied volatility, which reflects expectations of how much prices will move over a particular period, has already risen. One-month sterling/dollar implied volatility is 8.26 percent, its highest since September 18, 2014, the day Scotland voted on whether to remain part of Great Britain. One-year volatility is at its highest since July 2013.
Even so, these measures could rise further. Historical volatility, which tracks the scale of sterling's actual moves, has also been climbing and actually surpasses implied sterling/dollar volatility at the one-month tenor. This cannot last unless sterling's exchange rate starts flat-lining. Given how unlikely that looks right now, more volatility is probably the likeliest scenario.