Monitoring Sterling Volatility

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A calmer tone has emerged in the past few sessions that suggests the second half of the month could prove to be calmer than the first. We can see this in the fall in volatility measures from the highs recorded at the start of August. Equities have also recovered from the late July/early August sell-off from the year’s highs and we are also seeing stability in the dollar after the surge seen during July. Naturally, the geo-political tensions surrounding Russia and Ukraine remain in the background, together with the escalation of events in Iraq. So far, market implications from the latter have been relatively limited, but with more involvement from more countries, it could server to curtail risk appetite should events continue to run at the current pace

For the coming week, sterling volatility is likely to again be a risk given the release of inflation numbers on Tuesday. Last month’s reading was notably firmer than expected by much of this appeared to be down to the timing of summer sales, so some fall-back from the 1.9% reading is expected. The release of minutes to the August MPC meeting are also seen on Wednesday, but there were few signs from a Carney interview over the weekend (Sunday Times) of division between MPC members that would be reflected in some voting for higher rates. He also under-played the link between wage growth and interest rates, probably mindful of the risk of markets focusing too strongly on any one particular indicator , as proved to be the case with forward guidance and the unemployment rate last year (which fell a lot faster than expected). We’ve seen sterling take on a slightly firmer tone as a result during Asian trade, but so far with little follow-through during the European session.

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