Lower volatility prevailing for now

August 18, 2015

The focus for sterling today will be with the inflation data released at 08:30 GMT. The debate regarding the timing of the first interest rate increase in the UK appears to be gathering strength, even though on balance expectations remains grounded in 2016. We’ve had one member of the MPC voting for higher rates and at the same time, more noises from others on the need for higher rates (as we saw yesterday), even if they are not yet voting for this at the monthly meetings. Although the headline rate remains zero in the UK, only 5 of the 12 main categories within the index are seeing negative headline rates. CPI is seen holding zero in YoY terms, with the core rate seeing rising from 0.8% to 0.9%. Sterling could well be more sensitive to the numbers given the greater focus on the potential for higher rates, so a firmer number could well line cable up for a re-test of yesterday’s highs.

Looking elsewhere, what has been noticeable is the decline in volatility seen through the recent weeks, especially after the Greek crisis left the headlines. We’ve seen the Average True Range on EURUSD (1 month) fall to the lowest level seen since March of this year and falling by 30% from the levels prevailing May and June. The same holds true for USDJPY, where the decline in ATR on the same measure has been nearer 40%. Naturally, lower ranges are also a symptom of the summer holiday period. That said, with the Fed meeting approach in September, together with the risk of a Greek election in the coming weeks and negotiations of a Greek debt restructuring likely to start in October, then this lower level of volatility is likely to prove temporary.

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