GBP: Currency Index & Volatility

Relative Currency Strength

After losing value every single day except Monday during the research time period, the British Pound became the worst performing currency in the market last week. It was also joined by the Australian and Canadian dollars, which lost 0.96% and 1.29%, respectively due to pressure coming from oil prices. Moreover, all mentioned currencies were struggling amid US Dollar’s relative strength caused by comments from different members of the FOMC, including Chair Janet Yellen, concerning the upcoming rate increase. They confirmed that it is likely to take place in 2015. The Greenback, however, finished the period with a slight 0.11% loss.

The Pound Index started the week with a decline below 99.5 points, but losses had already been in place three days before the period started. While there was lack of data from the United Kingdom or elsewhere, the Sterling was mainly pressured by strong US currency, which was underpinned by several FOMC speeches. On Friday it became clear that the British currency is highly likely to end the week with considerable losses. Some hopes were raised on Monday, although US trading session continued to dictate market sentiment. As a result of that, the overall negative change was extended down to 1.5% by the period’s end. GBP tanked the most versus positive fundamentals-driven Kiwi (-2.64%) and the Euro (-2.53%), which firmed amid broad risk aversion.

Volatility

Even though the period was unusually quiet in terms of inland fundamental releases, the Pound managed to register well-uplifted volatility in course of the whole time period. Regional spikes in the Volatility Index were taking place every day, but they were predominantly caused by news coming from different countries around the world. Therefore, the elevated volatility stood at healthy level of 45%, down slightly from average of 47% showed by the market. The threshold of 50% was reached by the EUR/GBP cross (53%) due to high fluctuations of the common currency and GBP/CHF (50%). GBP/CAD was in turn the most silent currency pair during the period as it was increasingly turbulent in just 24% of all time.

The main chart confirms a lot of spikes and valleys for the GBP Volatility Index throughout the whole period ended September 29. First increase of the week took place on Wednesday when Canadian retail sales were released and the ECB President Draghi testified before the European Parliament. Additional gains were observed on Thursday amid the bunch of data from US and the Euro zone including durable goods orders and German IFO business climate. However, the period’s high of 1.84 points was hit on Friday, when American data showed the country’s economy rose even more than projected in the second quarter of 2015, namely by 3.9% vs a 3.7% estimate. The second highest advance in turbulence occurred on Tuesday in time of BoE’s Governor Carney speech in London.

Currency Significance

Correlations between different crosses of the UK currency held at fairly high levels in course of the reported trading period, while the composite hovered within normal range of the last few weeks. Looking at the mean correlation coefficient (0.36 points) for the five-day period from Wednesday of last week till Tuesday of this week, it was marginally higher than 0.33 points registered during the past month. Moreover, it has precisely matched the annual reading of 0.36. Components, which posted longer tails, included GBP/EUR & GBP/AUD and GBP/EUR & GBP/NZD as their average correlations even failed to exceed 0.2 points.

On Wednesday of the previous week the composite was showing mixed performance as initial weakness was later changed by solid gains above the historical average correlation index of 0.34 points. The composite was growing every day until Monday afternoon, when the weekly peak was set at 0.54 points. However, bearish impetus created by the Aussie, Loonie and Kiwi eroded all previous gains of the composite, which slid as low as 0.14 points by Tuesday morning. Commodity-linked growth-related currencies were rallying on the last day of the period as gains in Asian stock markets spurred risk appetite and reduced demand for safe-haven currencies. Moreover, additional momentum was provided by rising oil prices. All in all, the period was finished below the historical mean at only 0.27 points.

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