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(Bloomberg) — The cost of hedging swings in the value of the pound hit the highest in almost three months as traders await a Bank of England interest-rate decision on Thursday and a by-election that could trigger a bid to oust UK premier Keir Starmer.
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Overnight volatility in sterling rose to 13.72%, its highest level since late March. Sterling strengthened 0.2% in early London trading to around $1.33 after data showed Britain’s labor market held up better than expected in May.
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While the BOE is expected to leave interest rates unchanged in its midday decision as the inflationary threat of higher oil prices subsides, markets fully price a quarter-point increase by year-end as well as the possibility of another move.
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With results due from the Makerfield vote in the North of England in the early hours of Friday, traders are braced for political turbulence. Starmer’s Labour rival Andy Burnham has been tipped to win.
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The result may unsettle UK assets because Burnham is seen as potentially more inclined to borrow and spend than Starmer, according to Joel Rossier, fixed-income strategist at Danske Bank A/S.
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What It Would Take for Labour to Replace Keir Starmer: Explainer
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Economists predict the BOE will keep Bank Rate at 3.75% as energy prices ease on hopes of an end to the conflict in the Middle East. US President Donald Trump signed an interim agreement with Iran to end the war and reopen the Strait of Hormuz, accelerating the timeline for de-escalation.
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BOE Set to Hold Rates With Energy Shock Receding: Decision Guide
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