Euro: Volatility divergence points to future swings against US Dollar – Commerzbank
Commerzbank’s Volkmar Baur highlights that EUR/USD realized 3-month volatility has dropped to near five-year lows. He links part of the calm to highly correlated central bank rate expectations driven partly by oil prices, but notes this cannot fully explain the move.
Commerzbank's Volkmar Baur points out that the EUR/USD 3-month volatility has reached near five-year lows, but this cannot fully explain the current situation. Implied volatility is now more than one percentage point above historical volatility, indicating that markets anticipate a rise in EUR/USD volatility. Over the last nearly 20 years, there have only been three periods where the realized 3-month volatility was lower than it is currently, with it occurring on just 2.2% of trading days.
Comparing other G10 currencies, a lower exchange rate volatility against the euro is more common in currencies with higher central bank rate expectations this year compared to last. Currently, historical volatility is more than one percentage point lower than expected volatility for the next 3 months, a divergence that has only been observed on about 4% of trading days in the past almost 20 years. Despite the current low overall volatility, the market expects it to increase soon.
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