By Saikat Chatterjee
LONDON, May 29 (Reuters) - The pound held near a four-month low against the euro on Wednesday as rising British political uncertainty prompted investors to brace for greater swings in the currency in the coming months.
A gauge of the difference between expected swings in the British pound over the next three and six months rose to its highest level in more than three years as investors anticipated more volatility in the coming months.
Prime Minister Theresa May has said she will step down on June 7, triggering a race to replace her.
While one candidate, Foreign Minister Jeremy Hunt, said a no-deal Brexit would amount to "political suicide", while other candidates including front-runner Boris Johnson have signalled that they are prepared for such an outcome if Brussels does not reopen negotiations over May's unpopular agreement over Britain's withdrawal from the European Union.
The new prime minister will only have three months to negotiate a deal of some sort before the Oct 31 date when Britain is scheduled to exit the EU.
"Lots of sub-plots may emerge along the way but we are moving toward another binary outcome that will likely result in increased pound volatility," MUFG analysts said in a note.
Implied volatility gauges GBP3MO=, GBP6MO=, which measure expected swings in the pound in the coming months, have risen since last week.
Derivative markets are indicating increased jitters about the Oct. 31 deadline, with implied volatility contracts expiring after that date trading at a significant premium to those expiring earlier.
Against the euro EURGBP=D3, the pound was trading at 88.30 pence, not far away from a four-month low of 88.50 pence, hit last week. It was broadly stable against the dollar GBP=D3
(Reporting by Saikat Chatterjee; Editing by Hugh Lawson)
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