LONDON, Jan 8 (Reuters) - A market gauge measuring expected volatility in sterling was trading at a more than a three-year low on Monday, with investors seeing risks around Brexit as fading and betting, therefore, that big price swings would be unlikely in the coming months.
The decline in volatility for the pound comes after a particularly choppy 2017, when the British currency was buffeted by headlines about the progress of Brexit negotiations as well as a general election, prompting some investors to say that sterling should be traded like an emerging market currency.
A gauge measuring three-month implied volatility in the currency against the dollar, derived from currency options , was trading around 6.6 percent, its lowest levels since November 2014, according to Thomson Reuters data.
That compares roughly with realised volatility of around 8.1 percent for sterling against the dollar over the last year.
Six-month benchmarks were trading near similar milestones, at around 6.8 percent.
“Investors think Brexit risks have reduced for now and with the dollar quite firmly on the back foot, markets are more comfortable selling volatility on sterling for now,” said the head of capital market sales at a European Bank in London.
The drop in expected price swings gathered steam after Prime Minister Theresa May secured progress in the complicated process of leaving the European Union last month - so much so that expected volatility in sterling in options with up to one-year maturities is now below even some major rivals, such as the Japanese yen and the euro.
The dollar’s recent weakness and the renewed optimism in global stock markets has also played its part, with risk appetite strong as world stocks enjoy their best start to the year in eight years.
A gauge measuring expected price swings in the stock market is trading at more than two-decade lows.
Falling volatility has also encouraged a shift in market positioning towards sterling, which is up more than four percent over the last two months against the dollar.
Net long bets on sterling are near their highest in more than three years, according to data released by the U.S. Commodity Futures Trading Commission on Friday.
“Sterling has been dominated by Brexit-related headlines and the fact there is a bit of a constructive tone from both parties in recent weeks has removed some of the volatility premium from sterling,” said Alessio de Longis, portfolio manager at Oppenheimer Funds which manages $235 billion in global assets.
Reporting by Saikat Chatterjee; Editing by Jemima Kelly and Toby Chopra