Research by Morgan Stanley reveals that the British pound is less resilient to large trades than the euro or yen. It shows price swings similar to smaller currencies like the Swiss franc or New Zealand dollar, despite being the fourth most-traded currency globally.
A $1 billion trade can cause noticeable shifts in sterling, unlike the Japanese or European currencies. This indicates the dominance of global capital flows over trade in affecting exchange rates. Morgan Stanley’s analysts observed sterling’s lower liquidity, with price impacts varying based on the timing and location of trades.
Primary Drivers Of The Pound
Their research, using simulated client orders during peak hours, suggests that capital flow movements are the primary drivers of the pound. The findings were reported by Bloomberg.
The pound is showing signs of being less able to handle large trades, making it more vulnerable to sharp moves. We should expect bigger price swings than we typically see in other major currencies like the euro. This suggests that for the coming weeks, strategies that benefit from volatility should be considered.
With the Bank of England’s next interest rate decision coming in early October, uncertainty is already building. UK inflation data from August 2025 came in at a stubborn 3.1%, making the bank’s next move difficult to predict and inviting speculative capital flows. This is precisely the kind of environment where the pound’s thin liquidity could lead to an outsized reaction.
Lessons From The Past
We only have to look back to the market turmoil in September 2022 to see how this can play out. The “mini-budget” announcement at that time triggered a record plunge in sterling, demonstrating its extreme sensitivity to sudden shifts in investor confidence. That historical event highlights the risks and opportunities we face today.
Therefore, we are looking at buying options contracts to position for a significant price swing without being exposed to unlimited risk. One-month implied volatility for GBP/USD is currently hovering around 9.5%, which could prove to be a bargain if a policy surprise sparks a major move. We will also pay closer attention to executing trades near the London close, as this period appears to have a greater price impact.
