The currency is likely to be the barometer of market nerves. The cost of hedging the currency has jumped considerably in recent weeks, as shown by the implied volatility of sterling against the US dollar over both the next three months – the time until the general election – and the next two years: the possible timeframe for any EU referendum.
Political worries may lead to market uncertainty in the run-up to the election, but there are bigger worries on the horizon for many investors. The extension to the Greek bailout ends in June, which could coincide with the US making noises about the first rate hike – a perfect storm of volatility. However, the UK economy is likely to grow at twice the pace of the eurozone and the better footing of the economy should offset some of the doubts surrounding the election result.
Kerry Craig is global market strategist of JP Morgan Asset Management
