Pound Volatility Swells Amid Data Misses, Central Bank Outlook

Pound traders will begin next week more nervous than usual.

The Bank of England and the Federal Reserve are both set to comment on interest rates on the same day, June 17. Both nations report inflation, though economists are overestimating the strength of U.K. data by the most in 2015. Greek officials were set to submit counter-proposals to creditors over the weekend to avoid default, while Standard & Poor’s said Friday that Britain’s top credit rating is at risk because of the government’s planned referendum on European Union membership.

No wonder a gauge of the pound’s volatility versus the dollar just jumped the most in six weeks.

“Maybe the market doesn’t know which way to point,” said Stuart Bennett, head of Group-of-10 currency strategy at Banco Santander SA in London. When the Federal Open Market Committee releases its interest-rate decision, that “might provide a little bit more direction,” he said. Speculating on currencies including sterling will be hard “unless the market has some sort of clarity, be that on Greece or the Fed,” Bennett said.

Expected swings in sterling against the dollar for the week ahead catapulted 2.47 percentage points to 10.70 percent as of 5:30 p.m. London time Friday, the biggest increase since the period ended May 1 leading up to Britain’s general election.

The so-called implied volatility was fueled by events such as the Markit Economics Purchasing Managers Index for U.K. services missing even the lowest economist forecast of 57.8 on June 3. On the same day a gauge of U.K. house prices showed the slowest growth in almost two years.

Volatility Jump

A similar volatility gauge in sterling against the euro, was at 13.53 percent, the highest Friday close since on May 1. In a statement on Friday, S&P lowered the outlook on the country’s AAA rating to “negative” from “stable.”

Sterling increased 1.9 percent to $1.5552, its first weekly gain since the period ended May 15. The pound strengthened 0.4 percent this week to 72.36 pence per euro, recovering from the 73.89 pence touched on June 9, its weakest since May 8.

One report next week may show a pick-up in Britain’s core inflation rate, while another is forecast to show a decline in retail sales, according to a Bloomberg survey of economists.

Sonia forwards contracts signal a U.K. interest-rate increase in August 2016.

The Citigroup Economic Surprise Index for the U.K was at minus 35.3 on June 10, the lowest level for this year, and it has been negative since mid-April. A negative number means data releases have been weaker than forecast.

The BOE is scheduled to release the minutes of its meeting ended June 3 on June 17. In May’s minutes, all nine Monetary Policy Committee members voted to keep interest rates at a record-low of 0.5 percent but two said their decision was “finely balanced between voting to hold or raise Bank Rate.”

Policy maker Ian McCafferty, widely known for his hawkish stance on rates, said on Friday that the British economy is “starting to return to more normal conditions” and the time to begin policy tightening is approaching.

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