British Pound Futures Volatility Forecast (06/09/2011)

British Pound futures opened at 164 on Monday, plummeted to 162.8 on Tuesday, plunged to 162.4 on Wednesday, settled at 161.8 on Thursday and closed at 162.1 on Friday.

The current volatility is 0.51% (8% in annual terms) and the TGARCH plot is displaying a steady volatility curve whose inclination is neither upward nor downward sloping. However, the absence of short term explosion of the conditional variance looks a bit suspicious if compared to the price action that has been plummeting all week long.

There is clearly a violation of the leverage effect process going on because the volatility is not reflecting the actual market conditions. Usually, such a mismatch is a warning signal and it tends to precede drops in the price action.

The HyperVolatility team is bearish British Pound futures because an increase in the conditional variance should now accompany a plunge in futures prices which are likely to retest the 158 – 159 area by Friday.

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