Sterling takes a breather in a whippy week for trading

By Amanda Cooper

LONDON, Oct 11 (Reuters) - The pound held steady on Wednesday, recovering some stability after an intensely volatile week that has been dominated by safe-haven flows on the back of violence in Israel and by a sudden shift in expectations for interest rates.

Sterling is nudging at three-week highs against the dollar and the euro. The rally has been down, in part, to investors re-evaluating their expectations for U.S. interest rates and for the outlook for euro zone growth, rather than down to any standout UK-centric factor.

The pound was last flat at $1.2283 against the dollar and down 0.1% against the euro at 86.40, providing sterling traders with some respite from some of the big price swings seen earlier this week.

Volatility for sterling options that expire in one month's time spiked to the highest since July on Tuesday.

Implied volatility - a measure of how traders price an option - shot to a high of 8.56%, the most since 8.7% on July 24. These options expire after the Bank of England's next policy meeting on Nov 2.

Investors have turned mildly bearish on the pound for the first time since April, having amassed their largest bullish position in sterling since 2014 just a few weeks ago.

"A slowing UK economy has hurt the pound, especially against the U.S. dollar, which has benefited from a solid U.S. economy. However, any signs that UK growth is improving could prompt speculative positioning to be reassessed - moved to minor shorts last week just a few months after longs hit the highest since great financial crisis in July," DailyFX strategist Manish Jaradi said.


An industry body on Wednesday noted British employers cut their job vacancies for the first time in more than two and half years in September and reduced their hiring again, a recruiters' industry body said on Wednesday, adding to signs of a cooling in the labour market.

The Recruitment and Employment Confederation (REC) said there were signs a protracted slowdown in permanent hiring might now be bottoming out, something the Bank of England will factor into its thinking about the need for further interest rate increases to fight inflation pressures.

The outlook is not exactly reassuring. Having avoided recession so far this year, the UK is set to have the slowest-growing economy among the Group of Seven nations next year, just as the country will likely head to the polls for a general election, according to forecasts published by the International Monetary Fund on Tuesday.

The IMF said the outlook reflects the need for the BoE to keep rates high to bring down inflation, which is still above 6%.

The economy is expected to have grown by 0.2% in August, following July's surprise 0.5% contraction, based on a Reuters poll of analysts ahead of Thursday's gross domestic product data release.

Year-on-year, UK GDP is forecast to have expanded by 0.5% in August, from 0.0% growth in July.

Expectations for UK rates are split around 50/50 on one more rate hike from the Bank of England.

(Reporting by Amanda Cooper; Editing by Sharon Singleton)