GBP to USD: Explaining the 'wild ride' in the pound sterling vs US dollar exchange rate

The USD has maintained a tight range against the majors over the past day; however moves vs the British pound (GBP) have attracted attention.

The US dollar exchange rate complex (USD) remains constrained by recent right ranges.

At 09:00 in London we note the USD has not moved far off levels seen 24 hours ago:

If we take a look at the intraday price action of the GBP/USD, the story is however quite different.   

The below chart shows the intra-day action has been significant:

"Since last Friday, these types of wild swings have almost become a daily occurrence in the GBP/USD.  While we would love to attribute the move to jawboning by a central banker or economic data, the fact of the matter is that the catalyst is unclear," says Kathy Lien at BK Asset Management.  

Market analysts have commented on the swings seen right before the 4pm GMT London fix.

Predictably, a large amount of sterling also needs to be bought to settle the $23.9 billion cash payment that Vodafone shareholders expect to receive on March 4th from their disposal of the company's stake in Verizon but that only explains the immediate recovery and not the sale of the British pound suggests Lien.  

Lien goes on to say:

"Some large players could be using the recent strength in the GBP/USD as opportunity to position for a move lower.  Although this morning's U.K. economic reports surprised to the upside, M&A flow is one of the main reasons why GBP/USD is holding above 1.66.

"Without the Vodafone / Verizon deal, some investors may feel that the currency pair should be trading much lower given last week's disappointing economic reports.  We beg to differ and think sterling could move to the top of its recent range especially after today's economic reports and comments from Bank of England member Ian McCafferty.  

"The housing market continues to fuel growth with loans for house purchases hitting its highest level since 2007.  Consumer spending has also improved according the Confederation of British Industry's Distributive sales survey, which rose to its highest level in 3 years.  Based on improvements such as these, McCafferty feels that it is "not unreasonable" for rates to rise in the second quarter of 2015, sooner than the BoE's official projections.

"While he spent some time talking about the danger of a strong currency, he also said current pound exchange rates are not an issue."

Revisions to the U.K.'s fourth quarter GDP report is scheduled for release tomorrow but no changes are expected. As a result we continue to expect a positive bias in the GBP/USD.