Sterling fell against both the euro and the dollar on Tuesday, coming under pressure as support for Scottish independence rose dramatically with less than three weeks to go before a referendum that poses considerable risk for the currency. The cost of hedging against sharp swings in the British pound in the near term jumped on Tuesday, on track for its biggest one-day rise in three years as investors sought to insure against the risk Scotland breaks away from the United Kingdom.
One-month sterling/dollar implied volatility rose to around 6.10 percent, its highest level in five-months, up from 5.10 percent on Monday. A YouGov poll late on Monday showed support for the pro-independence "Yes" campaign had risen to 47 percent, a four point gain since mid-August and up eight points since the start of the month. The lead held by the "No" campaign to reject independence has slumped to 6 points from 22 points at the start of August. Scotland holds its independence referendum on September 18.
One-month risk reversals, a gauge of demand for options on a currency rising or falling, showed a greater bias for sterling weakness, trading at 0.5 vols and their most bearish skew in almost a year. The currency is centre stage in the Scottish referendum debate. Pro-independence leader Alex Salmond intends to share the pound while Westminster has been sceptical about such a deal, leading to some uncertainty.
Sterling dropped to $1.6554 against the dollar, down 0.25 percent on the day. Even the euro, which has been struggling due to expectations of further monetary easing from the European Central Bank, edged up 0.3 percent to 79.24 pence in London trade. "Sterling which is coming under a little pressure following the most recent Scottish referendum poll which showed a significant narrowing of opinions, giving the Yes campaign a boost," said Angus Campbell, senior analyst at FxPro.
"Sterling is heading lower...and will be one to keep an eye on as September 18 approaches." The cost of hedging against sharp swings in the British pound in the near term also rose as speculators sought to insure against the risk of Scotland leaving the United Kingdom.