GBP: Currency Index & Volatility

Relative Currency Strength

The GBP index spent the whole period below the baseline, with the most notable changes taking place in the end of the past week. Both Wednesday and Thursday mornings were marked by depreciation of GBP after BoE’s minutes’ release and lower-than-expected retail sales. The new week started with Tuesday’s mixed data on rising mortgage approvals, but declining net lending to individuals, which induced a moderate slide of the currency rate. Thus, the GBP index finished the period with a slight loss of 0.15%.

In terms of rapid value changes, the Kiwi was the most conspicuous currency of the period, as it fell sharply after RBNZ cash rate decision on Wednesday, causing its index to finish the period with a 1.42% loss over the base value. The best performers of the period were the Aussie, the Swedish krona, and the Greenback. The former pulled ahead early on Wednesday, after the release of Australian CPI. SEK and USD, in turn, started to gain strength later on Thursday, against the background of positive news on their national economies. The period ended with approximately equal gains around 0.6% for all of the three currencies.

Volatility

On Wednesday, EUR/GBP volatility started to climb in anticipation of BoE’s news, and reached its peak as the MPC reported its decision to leave the interest rates and amount of asset purchase unchanged. After that, BoE governor’s speech did not have much of an impact. With a drop in clothing sales, June’s retail sales released on Thursday largely disappointed forecasts, and the pound’s slump pushed volatility to the period’s highest values for both EUR/GBP and GBP/USD. Friday’s GDP data was in line with forecasts and had a muted effect, with volatility indexes higher on approach of the news than after the actual release. The beginning of the new week was mostly tranquil, and the UK credit data only managed to push volatility indexes to around 1.25.

This week proved to start as tranquil as the previous one, so the day shift in the period did not introduce any significant changes to the parameters. The pair’s with the pound were among the most turbulent ones in terms of elevated volatility percentage, with the measure gaining 5% for EUR/GBP even as it declined for most of the other pairs. Neither GBP/USD nor EUR/GBP volatility indexes refreshed their July 24 maxima, making the retail sales data the most shocking UK release of the period.

Currency Significance

Starting the week on a feeble level of 0.2, the composite jumped to 0.59 right after the BoE’s MPC votes on July 23. Mark Carney’s speech raised it even higher by midday, landing the pound’s significance measure at 0.62. Afterwards, however, the composite was showing a negative trend up to Monday, and even slid down to 0.32 as the UK GDP numbers released on Friday did not offer any surprises. On Monday, the composite started rising again, reached its best value of 0.66 on Tuesday, losing about 0.1 points to the previous period’s best.

Average correlations between GBP/EUR and other observed pound crosses held on a rather high level for the third week in a row, varying between 0.31 and 0.95. Compared to the long-term values, correlations with GBP/USD, GBP/JPY, and GBP/CHF have noticeably risen, illustrating a strong positive bond. At the same time, the lower tails of correlation distributions lengthened, reaching below zero for some components. In total, the pound significance measure was on a reasonably high level during the past period, holding its average around 0.48.