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Euro Price at Risk as Implied Volatility Spikes Ahead of ECB

Euro Price at Risk as Implied Volatility Spikes Ahead of ECB

Rich Dvorak, Analyst

JULY ECB MEETING HIGHLIGHTS EURO CURRENCY VOLATILITY

  • EURUSD implied volatility looks set to rise off historic lows
  • EURGBP, EURCAD, EURJPY, EURAUD implied volatility measures also rise as the upcoming ECB monetary policy update looms
  • Download the free Q3 Euro Forecast from DailyFX for comprehensive fundamental and technical outlook

Earlier this month, we highlighted how EURUSD implied volatility dropped to multi-year lows. Euro implied volatility is showing signs of turning higher, however, as key event risk surrounding pivots in European Central Bank (ECB) and Federal Reserve (Fed) monetary policy begins to unfold.

According to overnight swaps pricing, it is more likely than not that the dovish turn in outlook by the ECB will be confirmed next week with the central bank teed up to cut its policy interest rate by 10 basis points. Although, if the ECB does act to ease monetary policy, it will likely spark Euro currency volatility seeing that the probability of an ECB rate cut at its July 25 meeting is near-split at 51.2% in favor of a cut with the remaining 48.8% priced for a hold.

EURUSD PRICE CHART: DAILY TIME FRAME (DECEMBER 27, 2018 TO JULY 19, 2019)

Spot EURUSD price chart technical analysis ahead of July ECB meeting

Spot EURUSD is estimated to fluctuate within a 182-pip range between 1.1136 and 1.1313 with a 68% statistical probability judging by EURUSD 1-week implied volatility of 5.86%. If the ECB cuts rates, spot EURUSD could be expected to make a bearish move below technical support provided by the 23.6% Fibonacci retracement of the May 2019 low from the December 2018 high, which would also threaten the recently-formed bullish uptrend line.

On the other hand, a firm stance on rates and steady outlook provided by the ECB and the central bank’s President Mario Draghi could keep spot EURUSD bid and reiterate the Euro’s recent strength relative to the US Dollar and send the currency pair toward the 1.13 handle.

EURUSD, EURJPY, EURGBP, EURCAD, EURAUD IMPLIED VOLATILITY CHART (1-WEEK)

EURUSD, EURJPY, EURGBP, EURAUD, EURCAD implied volatility ahead of July ECB Meeting

EURJPY and EURAUD are expected to be the most active major Euro currency pairs over the next week with 1-week implied volatility readings of 6.59% and 6.29% respectively. EURCAD, EURUSD and EURGBP follow closely behind in order with 1-week implied volatility readings of 5.69%, 5.68% and 5.53%. All of the 1-week Euro implied volatility readings have climbed substantially since Wednesday, which reflects the potentially high-impact event risk posed by the upcoming July ECB meeting next week.

-- Written by Rich Dvorak, Junior Analyst for DailyFX.com

Connect with @RichDvorakFX on Twitter for real-time market insight

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.

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