LONDON (Reuters) - Britain's battered pound looks to be holding its own a month after the shock vote for a Brexit, even as the Bank of England prepares to take UK interest rates below their U.S. equivalents for the first time in a decade.
Sterling sank by 14 percent within hours of the decision to quit the European Union in June 23's referendum and banks were quickly falling over themselves to predict further losses and even a fall to parity with the euro or the dollar.
Implied volatility derived from the currency options market still suggests further swings of up to 15 percent are possible ahead of Thursday's BoE meeting, where a cut in interest rates to a record low of 0.25 percent is widely expected.
But volatility is way down from the peaks seen around the referendum and three-month risk reversals -- the balance between sterling "puts" and "calls", which indicates the extent of the directional bias going forward -- are back where they were before Brexit nerves began to bite last December.
Hedge fund desks at the big U.S. and European banks say speculative activity has tailed off and headline rates for sterling have recovered from a low of $1.28 to trade above $1.30 for the past three weeks. Against the euro, the pound has barely moved in the same period.
"The options market pricing is definitely a reflection of the fact that we have established a new and quite well-defined range," said Simon Derrick, head of global market research with Bank of New York Mellon in London.
"The move down to $1.35 probably fairly represented the additional uncertainty created by the vote to leave. Below that we will need to see other things, like action from the Bank of England and developments in the exit talks."
With the rapid appointment of Theresa May as Prime Minister easing immediate political concerns, many of the traders who made money around the pound's slide on June 24 have headed for the beach.
The head of hedge fund sales at one big U.S. bank said major speculative players would not come looking for substantial weakness until Britain is closer to triggering Article 50 of the EU Treaty, which starts the clock on its exit from the bloc.
Until then, the chief question is whether the first hard output data shows the blow to investment and business confidence from the vote has put Britain on course for recession or just a minimal slowdown.
A veteran of the European Exchange Rate Mechanism crises of the early 1990s, Derrick points to historical signs that sterling could suffer if the BoE, seeking to prop up growth, cuts interest rates far below those in the United States.
Only on three occasions since the 1970s have UK rates been lower than U.S. equivalents. In the longest of these, in the middle of a grim economic downturn between 1980 and 1984, sterling fell by 49 percent. goo.gl/GRaxpD
That chimes with the nerves that led a quarter of the 64 banks polled by Reuters at the start of July to forecast the pound falling to $1.22 or less by the end of the year.
"I can't see anything out there that tells me the pound is cheap and is going to bounce," says Davis Hall, Head of FX and Precious Metals at European wealth manager Indosuez in Geneva.
"If you are looking for a currency to short against the dollar I'm afraid it might be sterling."
One factor cited as propping up the pound in the past month has been the market's large net short positioning after one of the biggest days for currency trading in modern times.
Indosuez' Hall says that while futures market data -- due to be updated later on Friday [IMM/FX] -- shows net shorts at their highest in three years, they remain below three peaks hit in the pound's rollercoaster ride since the 2008 financial crisis.
"There is also this question as to whether a chunk of the market is actually still long sterling from before the Brexit vote," he says.
"A lot of people in retail and private banking were playing for the pop up in sterling after a vote to remain. If sterling rises to $1.35, $1.37 I think you will find them selling to reduce the loss from the original move."
Graphic by Nigel Stephenson; Editing by Catherine Evans