The FRR relationship between the GBP and the EUR has been markedly different than that between the CHF and EUR. Once the mattress trade ended and the FRR differential remained above zero into mid-2004, the GBP/EUR rate fell as expected. After mid-2004, British monetary policy tightened relative to that of the Eurozone and the FRR differential fell into negative territory. However, the GBP/EUR rate remained in a trading range rather than strengthening. And while the FRR differential remained negative, it was far from static: It fell sharply into the start of 2006 and then rebounded rapidly thereafter, all without a material and noticeable effect on the GBP/EUR rate.
Just as the volatility of CHF forwards fell continuously after early 2003, the volatility of GBP forwards also has fallen since late 2000, interrupted only by a May 2002-May 2003 rebound. EUR holders appear convinced the trading range will persist, as if ordained by some semi-official policy.
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