A significant increase in implied volatility before the ECB and the Fed

11.09.2019 10:22|Daniel Kostecki

Summer holidays are over and investors are getting ready for the most important event of the quarter, i.e. the decision of the European Central Bank, which did not manage to raise interest rates after the crisis, and is already forced to cut them again. In the background we also have the Fed, whose decision we will be published on September 18.

How important for investors and the market is the Thursday decision of the European Central Bank and next week's Fed decision may be evidence of what is happening on the fx options market. The expected volatility of weekly options for the EUR/USD currency pair increased to the highest level since January. The time horizon of volatility for weekly options includes not only tomorrow's ECB decision, but also September 18, and thus the decision of the US Federal Reserve.

Interestingly, the distribution of sentiment when it comes to the demand for options that can potentially gain as the price increases or decreases is similar. This may mean that investors are not determined as to the direction for the underlying EUR/USD pair. In other words, a significant event may increase volatility, but the direction of movement will be known depending on the decision. It is now widely assumed that the European Central Bank and the Fed will apply new measures in monetary policy, but the open question remains to what extent they will be. Will the ECB cut interest rates by 0.1 or 0.2 percentage point? Will it introduce QE, and if so, in what amount and for what time? Will the Fed cut rates by 25 basis points or more? There are many possibilities, hence the expectations for above average volatility.

Let us remind you that the decision of the European Central Bank will take place on Thursday, September 12 at 13:45, and the press conference will take place at 14:30. The Fed, after a two-day meeting, will announce its decision on September 18 at 20:00, and a press conference will be held at 20:30. Market consensus assumes that the ECB will cut the deposit rate from -0.4 to -0.5 percent. and will introduce QE worth 30 billion euros. Meanwhile, the Fed is expected to cut interest rates by 25 basis points.

Daniel Kostecki, Chief Analyst Conotoxia Ltd.

Materials, analysis and opinions contained, referenced or provided herein are intended solely for informational and educational purposes. Personal Opinion of the author does not represent and should not be constructed as a statement or an investment advice made by Conotoxia Ltd. All indiscriminate reliance on illustrative or informational materials may lead to losses. Past performance is not a reliable indicator of future results.

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