Pound’s Composure Threatened as Carney Returns to Center Stage

  • Currency’s implied volatility slides to lowest since January
  • Markets to look to BOE for greater clarity on future policy

The pound’s relative calm faces a fresh challenge as the Bank of England returns to the center stage.

Even as it ended a three-week run of gains, measures of the currency’s expected swings versus the dollar dropped to levels not seen since before the date for the U.K.’s referendum on its European Union membership was announced, signaling that a return to normality since the June 23 vote is being entrenched.

That tranquility may be shaken by inflation data that economists said will show consumer prices grew last month at the fastest pace since November 2014, to be followed two days later by the central bank’s latest interest-rate policy decision. In testimony to lawmakers this week, BOE Governor Mark Carney said the chances of a U.K. recession had fallen, even as he maintained that officials are ready to inject more stimulus if needed.

“Markets are going to focus on the BOE meeting in order to get some hints whether they are still is planning on cutting interest rates or not,” said Thu Lan Nguyen, a currency strategist at Commerzbank AG in Frankfurt. “If you look at rate cut expectations they have been reducing,” on stronger economic data.

One-month pound-dollar implied volatility dropped 0.76 percentage point this week to 8.34 percent as of 5 p.m. London time Friday, the biggest decline in a month. It reached 8.28 percent, the lowest since January, from as high as 32.1 percent on June 24, when Britain’s exit from the EU was confirmed.

The pound fell 0.3 percent this week to $1.3259, ending a three-week winning run that resulted in a gain of 2.9 percent. Sterling slid 0.8 percent to 84.61 pence per euro, extending its drop versus the single currency after the European Central Bank refrained from extending its monetary stimulus.

Sterling has outperformed all but one its 16 major counterparts in the past month as reports from services to construction showed the economy was holding up better than some economists predicted, marking a turnaround from when the Brexit vote and the resulting stimulus from the BOE made it the worst performer.

All of the 45 economists surveyed by Bloomberg predict the BOE to leave rates unchanged at their record low of 0.25 percent. The same survey also showed that analysts expect to keep the size of its stimulus plan at 435 billion pounds. Inflation probably accelerated to an annual 0.7 percent last month, according to a separate survey of economists.