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Currency VolatilityGBPUSD, NZDUSD Talking Points

  • Central Bank rate decisions in focus with both ECB and CBRT on tap
  • EURUSD & USDTRY expected to be the most volatile currencies this week

Top 10 most volatile currency pairs and how to trade them

1W Implied Volatility

Most Volatile Currencies This Week - EURUSD, USDTRY

Source: Thomson Reuters, DailyFX

*Through calculating the 1-standard deviation estimated range, this suggests that there is a 68% statistical probability that these pairs will trade within this range.

Most Volatile Currencies Next Week

Most Volatile Currencies This Week - EURUSD, USDTRY

Source: Thomson Reuters, DailyFX

EUR: The Euro will be among the most volatile currencies over the week as eyes turn towards the ECB meeting and Eurozone flash PMIs. Last week, we saw 1-week implied vols jump 1.7 vols to 5.875 as the expiry covered the ECB monetary policy meeting. That said, the 1-week implied volatility is only 2 vols above the 2019 low.

Most Volatile Currencies This Week - EURUSD, USDTRY

The ECB meeting is likely to lay the path for further stimulus in September, given that there has been little improvement in the Eurozone economy since Draghi’s dovish Sintra speech. As such, expectations are for an interest rate cut to be accompanied by a possible restart in asset purchases. That said, in recent sessions, money markets are now pricing in a near 50/50 chance that the ECB could deliver a 10bps cut as soon as this week, which option markets could be somewhat under-pricing, meaning that Euro puts are relatively cheap for such an outcome. Elsewhere, Eurozone PMI’s will be released on Wednesday and while this may induce a modest move in the Euro, it is unlikely to have much implications for the path of ECB policy.

Most Volatile Currencies This Week - EURUSD, USDTRY

Source: Refinitiv, DailyFX

EURUSD 1-week ATM vols of 5.875 = break-evens of73pips (meaning that option traders need to see a move of at least 73pips in either direction in order to realise gains). Risk reversals continue to show a slight topside bias at 0.4, suggesting that demand for calls are greater than puts. Although, a surprise decision to cut at this week’s meeting would likely see this reverse with EURUSD testing the low 1.11s.

TRY: The Turkish Lira will also be in focus as market participants look towards the Turkish Central Bank rate decision. Implied volatility has jumped ahead of the meeting, however, this remains significantly below the 2019 peak. Alongside this, risk reversals continue to show that option traders favour topside demand. The rate decision itself is expected to see a 250bps cut to 21.5% by the new Governor. That said, there is a risk of a deeper cut with reports on Friday noting that the former Governor had been fired for resisting requests for a 300bps cut in June. Of note, forecasts range from 100-500bps worth of easing.

Most Volatile Currencies This Week - EURUSD, USDTRY

For a more in-depth analysis on FX, check out the Q3 FX Forecast

--- Written by Justin McQueen, Market Analyst

To contact Justin, email him at Justin.mcqueen@ig.com

Follow Justin on Twitter @JMcQueenFX