GBP: Currency Index & Volatility

Relative Currency Strength

In the first two days of the perid the Sterling has even hovered below the baseline, awaiting the most important weekly event — the UK Election. However, exit polls showing that David Cameron’s Conservative Party won a majority of seats in the new House of Commons resulted in the Pound Index skyrocketing above 101. A positive trend was preserved for the rest of the period, and gains continued to accumulate, while the gap down to the second best performer, the Australian Dollar, continued to widen. An increase of the Sterling was additionally fuelled by the BoE’s Monday decision to keep monetary policy unchanged, as well as better-than-estimated UK manufacturing data on Tuesday. All in all, the Pound surged 3.14% in five trading days through Tuesday.

Without any doubt, the British Pound has been the best performing currency on the foreign exchange in course of the previous working week. There were many influential factors that altogether managed to push the UK currency considerably to the upside. The green performance has been observed against all major currencies, with the biggest increased posted by GBP/NZD and GBP/CHF crosses of 4.49% and 3.47%, respectively. Other currency pairs of the Sterling, however, followed shortly with significant gains as well. In the meantime, the Kiwi lost the most last week, as continuous weakness pushed its currency down by 1.81% on a weekly basis.

Volatility

While waiting for the Election Day on May 7, the Pound’s volatility stood mostly around the mean historical levels, as markets were undecided on the result of the election itself and opinion polls pointed on the Hung Parliament eventually. Neither US ADP Employment data nor UK Services PMI gave the GBP volatility enough impetus on Wednesday. However, the next day the turbulence maximum was reached as the Sterling’s volatility index climbed as high as 5.83 points, while some of the currency pairs posted the indicator close to 7 points (GBP/JPY and EUR/GBP). Volatility remained uplifted in the beginning of a new working week, but the new spikes on Monday and Tuesday have already been driven mostly by fundamentals.

Judging from the main volatility chart, it may seem that the Sterling has been increasingly volatile during only one weekly event—the UK General Election on Thursday. However, the real situation used to be slightly different, and the Pound was turbulent for the biggest part of all time throughout the week. Elevated volatility indicator stayed at 54%, which is way above the number seen during two previous weeks. Moreover, the market average elevated volatility of 48% has also been surpassed. Among currency pairs, the most turbulent one used to be the GBP/NZD (62%), reflecting strong divergence between price developments of these two currencies last week.

Currency Significance

The composite started the period with exceptionally low correlation reading at just 0.26 points. However, the first upside momentum was caused by UK Services PMI data, but growth was not sustained for that moment and the real recovery began only on Thursday. All currency pairs of the British Pound behaved in the same manner on Thursday evening and the move continued through Friday as well. During these two days the mean correlation coefficient between all GBP currency pairs jumped to 0.90 points at its maximum, the level we have not observed for a long period of time. Despite that, the united movement of the pairs was nullified on Monday, and the composite returned to its historical averages. Therefore, the correlation coefficient closed the previous week’s time period at the mark of 0.41.

The period was rich with influential fundamental releases on the Pound, in particular, thus resulting in rather volatile correlations. The distributions of the components have also had quite long and wide tails in the majority of all cases, except GBP/EUR with GBP/CHF. The composite itself, which measures the significance of the Pound on the market, stayed at 0.53 on average, much higher than both 20, 130 and 250-day averages, as well as above the level seen two weeks ago in our previous review. Meanwhile, GBP/CHF and GBP/EUR, along with GBP/EUR and GBP/SEK demonstrated one of the highest correlations during the week at 0.79 and 0.72 points on average, respectively.