One-month euro/dollar option volatility spiked to 9.7% last Wednesday up from 8.9% the previous week. The jump was largely influenced by movements in the spot market with volatility increasing as spot approached USD1.1, where several options players hold short positions, according to a trader in New York. Spot traded at USD1.096 Wednesday afternoon up from USD1.083 the week before.
Vol was bought and sold last Wednesday on the back of spot moving closer and further away from USD1.1, said the trader, noting that spot movements were tied to equities. The euro is expected to rise, breaking through the USD1.1 barrier, with the next pocket of resistance expected to occur at USD1.15.
T.J. Marta, foreign exchange strategist at Citigroup Global Markets, disagrees with the prediction that the euro will continue its appreciation against the dollar. He said the single European currency has "popped." Last Wednesday, Citigroup closed its long euro/dollar recommendation, believing there will not be a trend in either direction over the coming several months. With the Iraqi conflict no longer dominating news, the market seems to have exhaled and doesn't know what to do, he noted. In the mid-term the U.S. economy is expected to pick up. Marta believes the next significant trend will start in June or July, seeing the dollar strengthen against the euro to sit at USD1.02-USD1.03 by year-end.
EUR/USD Spot & One Month Implied Volatility