One-month implied volatility on the euro/dollar jumped to 12.4% last Wednesday from 10.8% the previous week, as the dollar fought back against the euro in the spot market and broke through key technical levels. The dollar fell to USD1.21 against the single currency last Wednesday from USD1.26 seven days before, said a New York-based trader. Volatility surged after the dollar broke through USD1.23, which was considered to be a key technical level, he added.
A string of economic data signaled a strengthening U.S. economy, the trader said. Expectations that strong non-farm payroll employment figures would also be released, which were scheduled for Friday after DW went to press, contributed to the dollar rally as did nervousness that the European Central Bank may consider cutting interest rates.
Strong demand for short-dated options dominated trading, with one-week and one-month maturities getting well bid, said the trader. Euro puts/dollar calls with low downside strikes, protecting against a move to USD1.18, were the most popular trade, he said. U.S. non-farm payroll employment figures will drive short-term movement in the currency pair and this will likely keep spot choppy and volatility high, he projected.
Lauren Germain, foreign exchange strategist at Bank of America in New York, agreed that the U.S. payroll figures will dominate spot movement over the next few weeks. Overall, however, the euro is expected to strengthen. The ECB is unlikely to cut rates unless the dollar trades over USD1.3 and the dollar will likely stabilize around April, when speculation of a U.S. rate hike is expected to gather momentum, said Germain.
EUR/USD Spot & One-Month Implied Volatility
