LONDON- Trading in the British pound has fallen sharply since March when Britain delayed its exit from the European Union, with turnover in May down almost a tenth versus a year earlier and activity in the futures market at its lowest since 2016.

Average daily turnover of sterling dropped to $249.5 billion in May, its lowest in 2019, data compiled by CLS, a major settler of trades in the $5.1 trillion-a-day foreign exchange market, showed.

Futures market activity has fallen as the political uncertainty stemming from the Brexit postponement to Oct. 31 and the contest to choose a new British prime minister encouraged investors to sit on the sidelines.

According to data from CME, one of the world's biggest exchanges, average daily volumes of sterling/dollar futures contracts fell nearly 18% in May versus a year ago. April's average daily total was the lowest since August 2016, shortly after Britain voted to leave the EU.

Price swings in the pound have also eased sharply since April.

One and three-month sterling/dollar implied volatility gauges - a measure of expected price swings GBP1M0= GBP3MO= - are close to their lowest since early 2018. More volatile price moves tend to correspond to bigger trading volumes.

"There was heightened Brexit uncertainty (in March). Now we know Britain will remain in the EU until the end of October so there's not the same need to trade," said Lee Hardman, a currencies analyst at MUFG. "We anticipate a pick-up (in volatility) the closer we get to October."

The weakness in May sterling turnover - which covers cash, forward and swap markets - mirrors a drop in broader forex market activity, as reduced volatility discourages trading. 

A major dovish shift by the world's biggest central banks and difficulty in discerning who will lose out most should a U.S.-China trade war escalate have left FX traders uncertain as to where currency prices are headed, even as investor worries have raised volatility in stock and bond markets.

In the futures market, the drop in sterling activity has been more marked. May ranked as the quietest month since October 2018, although this follows a particularly busy March when traders prepared for Britain to leave the EU.

MUFG's Hardman said that once a new prime minister is chosen to replace Theresa May, he or she will have a short window after the summer to try to renegotiate the Brexit withdrawal deal and break a deadlock in parliament before October.

That should spark more uncertainty about what form Britain's departure will take, and even whether it will leave the EU at all, increasing volatility.

(Graphic by Saikat Chatterjee Editing by Sujata Rao and John Stonestreet) ((thomas.wilkes@tr.com; Reuters Messaging: thomas.wilkes.thomsonreuters.com@reuters.net))