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Pound Stuck at 4-Year High as Volatility Slumps

April 26 (Bloomberg) -- A measure of the pound’s volatility against the dollar dropped to the lowest level in 16 months this week as the Bank of England said inflation pressures remained subdued, damping the case for higher interest rates.

Price swings are slowing as the pound trades within 0.3 percent of a four-year high. While minutes of the central bank’s April meeting said the “economy was building momentum,” Governor Mark Carney also has said there is scope to wait for the absorption of spare capacity in the economy before raising the key rate from a record low. A gauge of global foreign-exchange volatility fell to the lowest since 2007. U.K. government bonds advanced.

“Cable volatility has really collapsed since mid-February,” said Olivier Korber, a derivatives strategist at Societe Generale SA in Paris, referring to the pound-dollar exchange rate. “The BOE position is well priced in. The pound is range trading following its appreciation.”

The pound was little changed in the week at $1.6806 as of 5:03 p.m. London time yesterday. It rose to $1.6842 on April 17, the highest level since November 2009. Sterling was also little changed versus the euro, at 82.35 pence, after appreciating to 81.98 pence on April 22, the strongest since Feb. 28.

Implied three-month volatility for the pound versus the dollar was 5.29 percent after falling to 5.27 percent on April 24, the lowest since December 2012.

Liquidity Withdrawal

Currency volatility has declined as the Federal Reserve avoided stoking expectations for higher interest rates while slowing the pace of bond-buying stimulus. The European Central Bank’s commitment to keeping policy accommodative for the foreseeable future and the Bank of England’s indication that any rate increase will come in 2015 at the earliest have also subdued price swings.

The BOE minutes released on April 24 showed officials voted unanimously this month to keep the key rate unchanged at 0.5 percent and to maintain the stock of purchased assets at 375 billion pounds. Since the meeting, data has shown unemployment dropped below the 7 percent threshold at which the BOE said it would consider raising rates.

The pound was supported as the Office for National Statistics said U.K. retail sales including auto fuel rose 0.1 percent from February, when they gained 1.3 percent, beating the 0.4 percent decline predicted in a Bloomberg survey of analysts.

GDP Growth

Sterling has gained 5.5 percent in the past six months, the best performer among 10 developed-nation currencies tracked by Bloomberg Correlation-Weighted Indexes as signs the economy is strengthening boosted bets the Bank of England will hasten plans to increase interest rates. The euro strengthened 1.3 percent and the dollar rose 1 percent.

Data next week will show gross-domestic-product growth accelerated to 0.9 percent in the first quarter from 0.7 percent in the previous three months, according to a survey of economists before the report on April 29.

Benchmark 10-year gilt yields fell three basis points, or 0.03 percentage point, in the week to 2.64 percent. The 2.25 percent bond maturing in September 2023 rose 0.24, or 2.40 pounds per 1,000-pound face amount, to 96.795.

U.K. government bonds returned 2.8 percent this year through April 24, according to Bloomberg World Bond Indexes. German securities also earned 2.8 percent and U.S. Treasuries gained 2.2 percent.

To contact the reporter on this story: Neal Armstrong in London at narmstrong8@bloomberg.net

To contact the editors responsible for this story: Paul Dobson at pdobson2@bloomberg.net Mark McCord

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