GBP: Currency Index & Volatility

Relative Currency Strength

The Sterling index was one out of five major currencies that posted gains during the last five trading days, advancing 0.28%. Such an incremental change can be explained by the fact Mark Carney made it clear the Bank of England will not raise interest rates any time soon, until the remaining slack is eliminated. The central bank focuses on the wage and productivity growth, meaning that only statistic from the labour markets can be a major catalyst for the Sterling. At the same time, the Swiss Franc was the top-performer, climbing 0.85%, as renewed tensions in Ukraine boosted risk-on sentiment. In contrast, the kiwi and Aussie declined after a solid rally several weeks earlier.

GPB index fluctuated between 99.63 and 100.22 over the period, supporting the case that even important fundamental data has little impact on the currency. On Wednesday, a release of the stronger-than-excepted trade balance pushed the index to 99.97 from 99.92 earlier. Later on, the cable was trading in a narrow range following the Bank of England meeting, as policy makers offered no surprises, staying pat both on the interest rate and the stimulus programme. The GBP/USD pair moved slightly lower on Thursday, trading around 1.6764 level, posting no impressive moves amid soporiferous central bank's meeting. Even hawkish comments from George Osborne were not able to provide any boost to the Pound, with the index ending a period at 100.22.

Volatility

Over the observed period, both the cable and the overall market remained mostly in the tranquil zone, as FOMC minutes, Bank of England meeting and a bunch of fundamental data from the world’s largest economy were not able to push GBP/USD volatility and Dukascopy Bank volatility index above 2.74 and 2.15 respectively. The most volatile currency pair was NZD/USD, with the elevated volatility being observed in 43% of the time– almost a half. On Tuesday, April 15, the pair sank to 0.8596 after a release of the disappointing inflation figures from New Zealand, as falling imports prices outweighed a surge in utilities. The least volatile was EUR/GBP, as a lack of events from Europe and no surprises from the U.K. resulted in a modest performance.

The cable’s and market’s volatilities were moving in the same direction for most of the time. Nevertheless, inflation data from the U.K. that was out on Tuesday, caused a high divergence between the Dukascopy Bank volatility index and the volatility of the GBP/USD pair. The ONS said consumer prices advanced only 1.6% in March, decelerating from 1.7% a month earlier, hitting the lowest since October 2009 and posting the third consecutive monthly drop in inflation. GBP/USD volatility rocketed to 5.01 immediately after the data was available to public. The main gauge of inflation stayed below the official target for three months, helping to ease the pressure on Mark Carney, who pledged to keep interest rates at a record-low of 0.5%. A strong rebound in wages and salaries will eliminate the remaining slack, increasing bets for a rate hike.

Currency Significance

Despite only a 0.28% increase of the Sterling, the average correlation coefficient was highly volatility over the observed period, meaning that markets were still paying attention to the events from the United Kingdom. The average correlation coefficient stood at 0.4239 one week ago and early on Wednesday, April 16, the gauge reached 0.3996, resulting only in a 0.0243 change. Regarding the mean correlation coefficient, it was either unchanged or declined over the last five trading days. As we already mentioned, the Swiss Franc was the last week’s top performer, hence, the mean correlation between the cable and GBP/CHF deteriorated significantly.

A release of upbeat trade figures on April 9 pushed the average correlation coefficient lower, as the day’s main highlight were the FOMC minutes. Despite an improvement in the trade balance, the latest figures are suggesting that the economy is far away from rebalancing, as current growth is boosted by a stronger demand for housing and a decline in the savings rate. The correlation coefficient reached its lowest point of 0.039 following the Bank of England’s meeting, bolstering the case that until we see some hawkish comments from Mark Carney, investors will not pay any attention to their gatherings. The highest point, however, was reached just a day ago, after the publication of the CPI figures on April 15. The index soared to 0.4437, however, the increase appeared to be short-lived, as later the index began moving to the south.