LONDON: Sterling fell back towards recent lows on Tuesday, keeping the cost of hedging against sharp swings over the next week at its highest in four years, as nervousness intensified before Scotland's vote on independence in two days time.
After days of choppiness caused by the heated Scottish referendum debate where the pound is centre-stage, investors will focus on economic data for a brief while on Tuesday.
UK inflation data is due out at 0830 GMT, and a softer-than- expected number would push back expectations of a rate hike and hurt the pound more, traders said.
Annual consumer inflation for August is forecast at 1.5 percent, slightly lower than 1.6 percent seen in July.
That is well below the Bank of England's (BoE) target of 2 percent.
"The slowdown in inflation would likely keep the pound under selling pressure before the Sept. 18 Scotland independence referendum as it makes a rate hike somewhat less likely," IronFX Global head of global FX strategy, Marshall Gittler, said. Sterling was down 0.3 percent at $1.6187, having fallen to a 10-month low of $1.6052 last week. The euro was up 0.2 percent at 79.87 pence.
Sterling has lost 2.5 percent against the dollar so far this month, hit by the view that uncertainty caused by a Scots' "Yes" vote would undermine investment and growth and prompt the BoE to push back an expected rise in interest rates.
Investors have been unwinding expectations of a rate hike since the middle of last month after data showed wage inflation was rather subdued and the BoE said that unless there was an uptick in earnings, monetary tightening was unlikely.
Markets are pricing in a small chance of the first rate hike in the spring of 2015.
Given all the uncertainty over the Scottish vote and question marks over the durability of the UK economy, hedge funds continued to seek protection against near-term swings in sterling.
One-week implied volatility, jumped to its highest since 2010 last week and remained around the same levels on Tuesday - implying the maximum swing in value over the course of a year at 16 percent.
Thursday's vote still carries substantial risks to that pricing, which implies a 3-5 cent fall in sterling from current levels.
A number of analysts have said sterling would fall more than that in the event of a "Yes" vote. "In any case, investors are unlikely to run large positions before the referendum," one spot trader at a North American bank said.
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