Euro/dollar one-year implied volatility hit a two-year low last week dropping to 10.4% on Wednesday from 10.7% a week earlier. Demand for options was low as traders cleared out their books ahead of the long weekend in the U.S., according to traders.
"The spot market is going to remain in a narrowing formation for the long term," said one options trader in New York. He added that after a rush on short-dated euro calls/dollar puts on Monday and Tuesday, the market saw little activity. "Volatility across the board has really slowed down. Sterling is moving in unison with the euro. I don't suspect we'll will see much more activity until after the holiday weekend," another trader noted.
Foreign exchange strategists are predicting the euro will continue to weaken and possibly go as low as USD0.8450 by the end of February before staring to regain its strength by mid-March. Andrew Chaveriat, v.p. of foreign exchange at BNP Paribas in New York, predicted the euro's decline will be short-lived and the currency could rally to USD0.8970 by August, before moving back down.
EUR/USD Spot & One-Year Implied Volatility
Source: JPMorgan
