Pound pummelled by stronger dollar, mounting Brexit fears

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London-based traders said investors had moved to hedge against the currency's going into free fall if Britain drops out of the European Union with no deal in less than eight months' time.

Sterling/dollar three-month implied volatility - a gauge of how volatile traders expect a currency to be - this week spiked to its highest since early March.

Last week, the Bank of England (BoE) raised interest rates above their crisis lows for the first time in almost a decade.

Connor Campbell, financial analyst at SpreadEx, said: "The fears of a no-deal Brexit have really gathered steam in the last few sessions, a snowball effect stemming from Mark Carney and Liam Fox's warnings either side of the weekend".

Christophe Barraud, an economist at Paris-based brokerage Market Securities, said: "A lot of companies can't wait for the negotiations outcome in October, so of course are trying to hedge against a drop in the pound".

Sterling and United Kingdom government bonds will fall further in the run-up to Brexit, even after the pound slumped this week to its lowest in nearly a year, prominent Brexit-supporting British hedge fund manager Crispin Odey said on Thursday.

"Some are thinking in the market that the BoE raised in order to given them ammunition to cut rates in the face of a no- deal", said Neil Jones, head of hedge fund FX sales at Mizuho Bank.

Viraj Patel, a currency strategist at ING, tweeted: "Brexit no deal risks for sure one factor but worth also noting seasonality effects (August being a bad month for the pound)".

But during periods of rising interest rates and higher inflation, this negative correlation has tended to reverse - a trend already noticeable in recent months and which has moved to zero a week after the Bank of England's recent quarter-point rate rise. The UK government has so far made little progress in agreeing on a post-Brexit trading deal with the EU. The pound has lost more than 10 per cent since April and is down nearly 15 per cent since the Brexit vote in June 2016.

Barclays said Friday's GDP data showed that the British economy's second-quarter rebound only offset the first-quarter weakness.

Puts are an option to sell an asset and calls the right to buy an asset.

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