GBP: Currency Index & Volatility

Relative Currency Strength

On May 20, the UK currency began trading to the upside already in the beginning of the day, while awaiting the minutes of the Bank of England’s last monetary policy meeting. Even though they revealed to surprising data and the stance remained dovish in terms of MPC members’ vote distribution, the Pound denied to lose value and surged to 100.5 points. The strongest bullish impetus was, however, provided by the British retail sales data on Thursday, where a 1.2% monthly climb let the GDP Index to jump above 101 points. However, the positive performance was gradually partially erased in course of the rest of the period. Despite that, the Sterling managed to register a healthy 0.8% increase in value for the period ended May 26.

Giving leadership to the American Dollar, the British currency traded in the green zone for most of the time during the period from last Wednesday until Tuesday of this week. As a result, the only decline of the Sterling was posted against the Greenback. On the other hand, the common European currency used to be the major under-performer during the previous week (-0.92%); therefore, the Pound managed to gain 1.54% against the Euro. EUR/AUD cross followed shortly with a weekly advance of 1.46%. Meanwhile, the Pound remains the third best yearly performer (+6.05%), after the Buck and Swiss Franc, which gained 16.2% and 9.14%, respectively.

Volatility

Despite being abnormally tranquil, the British currency succeeded in showing three time spans with high turbulence. Two of them were mainly caused by UK internal data. On Wednesday, the MPC’s vote distribution provided the volatility indicator with a significant spike, when it surged as high as 1.6 points. A day later, the retail sales data raised the turbulence index up to 1.3 points. On the other hand, the Friday’s climb to the weekly maximum of 1.7 points was provoked by better than forecasted CPI data from the US. The same day, UK public sector net borrowing has only had a minor impact on the Sterling, even though UK public finances showed a noticeable improvement in April, as budget deficit fell from 9 billion pounds to 6.03 billion pounds on year-to-year basis.

As can be seen from the main volatility chart, turbulence of the British Pound stayed on exceptionally low levels during the period, compared with many preceding weeks. The longest part of the week was spent below the historical average levels. The portion of elevated GBP volatility at 12% was substantially below that of the previous week at 33%. On the relative basis, the highest elevated volatility indicator was posted by GBP/USD and GBP/SEK crosses, as they used to be increasingly volatile in 17% of all time. On the other hand, GBP/NZD registered the lowest volatility among all major currency pairs of the Sterling at just 6%.

Currency Significance

The composite opened the previous trading week above the average historical level at 0.42 points and remained strong until Friday. In the meantime, the period’s highest correlation coefficient for the composite was hit on Thursday, underlying little divergence between different GBP crosses in time of the data release on British retail sales. However, surprising inflation numbers from the US used to have a strong downward influence on significance of the Sterling, as several components slumped considerably below zero and provided the composite with its lowest value of the week at just 0.20 points. Nevertheless, a rebound appeared to follow shortly, and on Monday the Pound’s mean correlations returned towards the historical average, where they remained until the end of the period.

Significance of the GBP, calculated as an average correlation between different crosses of this currency, stayed slightly above the historical average levels during the reported trading period. It can be observed that the composite developed in many ways on a positive side from the historical mean of 0.39. It is additionally proved by the mean correlation coefficient settling at 0.43 points, higher than both 6-month and annual readings. As usually, the closest correlation were showed by the GBP/EUR cross with GBP/SEK and GBP/CHF currency pairs at 0.72 and 0.75 points, correspondingly.