British Pound Lull to Persist on Flat Rates Outlook, Risk Decoupling

British Pound Lull to Persist on Flat Rates Outlook, Risk Decoupling

Fundamental Forecast for the British Pound: Neutral

• Pound Fails to Capitalize on CPI as BOE’s Weale Sounds Off
• UK Labor Market Unexpectedly Weakens as Jobless Claims Rise
• RICS: UK House Prices Fell Most in 15 Months in August

The British Pound was little changed last week, adding a meager 0.03 percent against a trade-weighted average of its major counterparts. Prices have been confined to a narrow range since the beginning of the month, with volatility readings lagging the spectrum of major currencies. The relative standstill has owed to a fairly stable monetary policy outlook, with traders seeing virtually no changes on the horizon for the foreseeable future, as well as a rapidly fading correlation with risk sentiment. Indeed, the link between the aforementioned trade-weighted average and the MSCI World Stock Index is now virtually nil while that of equities and typically risk-sensitive pairs like GBPJPY and GBPUSD has dropped below significant levels on 20-day percent change correlation studies.

Turning to scheduled event risk, the release of minutes from the last Bank of England policy meeting takes top billing. While traders will certainly pay close attention to the vote break-down on the rate-setting MPC committee as well as the rhetoric presented in the discussion leading up to the announcement, the likelihood of a material shift in the markets’ established outlook seems unlikely. The central bank has argued for some time that the upswing in prices since the beginning of 2010 owes to temporary factors, with the annualized inflation set to fall back below 2 percent by 2012. Given such a prolonged time frame, Mervyn King and company are surely going nowhere fast despite a promise to shift policy “in either direction” as needed, a comment likely directed at the domestic audience amid jitters about economic headwinds from the government’s austerity program. Indeed, a Credit Suisse gauge of rate hike expectations points to a static monetary policy for the coming year.

The remainder of the economic calendar is filled out with low-level releases, hinting that absent a re-coupling with risk appetite, range-bound conditions are likely to persist for the time being. Indeed, 1-week implied volatility readings suggest sterling price action will remain relatively quiet compared with the remainder of G10 FX space.