British Pound Experiences Heavy Volatility Trading in Massive 500 Point Range

Trading in the British pound had more to do with US dollar price action, but the moves were notable nonetheless.

GBP/USD managed to trade in a nearly 500 point range of approximately 1.75 – 1.80, but ultimately ended the day by consolidating in a smaller range of 1.7550 - 1.7625. Looking at the data on hand, the UK producer price index reflected declines in both input and output prices during the month of August, as the former fell 2.0 percent and the latter slipped 0.6 percent, marking the sharpest drop since record-keeping began in 1986. The declines were due primarily to a reported 4.8 percent plunge in petroleum product prices, but energy was not the sole factor as even core output prices slipped 0.1 percent. Overall, the data suggests that the Bank of England may be able to let their guard down sooner rather than later when it comes to inflation risks, especially since the central bank is already grappling with the issue of a rapidly deteriorating economy. This is much of the reason why Credit Suisse overnight index swaps are pricing in nearly 100bps worth of rate cuts by the Bank of England over the next 12 months, and if the official UK CPI numbers (due to be released on 9/16) signal that inflation is not accelerating as quickly as they expected, the central bank could start reducing interest rates before year-end. Thus, [B]from a fundamental perspective, downside risks remain for the British pound. However, the currency is also greatly oversold, and as Senior Strategist Jamie Saettele notes, the British pound could be nearing a turning point.[/B]