What FX Markets Are Telling Us About The ECB Policy Statement
Philip Baker | Jan 22, 2015 12:12AM ET
All eyes are on the Eurozone as the ECB hands down its Monetary Policy Statement at 1330 GMT today. Dow Jones reported that the ECB was preparing a €50bn/month QE program which would begin in March 2015 and run through to the end of 2016.
The forex option markets have priced in huge increases in exchange rate volatility of euro pairs ( ie EUR/USD, EUR/JPY, EUR/GBP) ahead of the announcement. As of 0230 GMT, implied volatilities of forex majors, compared to their three year statistical volatilities (“normal” levels?) were:
The implied volatilities are of daily forex call options expiring at 2000 GMT 22/1/2015, using the mid-point option premium.
Even non-euro pairs are pricing in significantly higher volatility than the norm.
To give an idea of what this means for the range of possible exchange rates, shown below are the low and high levels at 10% probability. That is, based on the implied volatilities, there is a 10% chance the exchange rate at 2000 GMT today could be below the low case and 10% chance it could be above the high case.
The interesting implication of the high volatilities (and possible exchange rate ranges) is that the market clearly perceives a high degree of uncertainty around the outcome – if it were certain, the spot exchange rates would already have adjusted and the volatilities would be close to their normal levels.
It goes without saying that traders should adopt extreme caution regarding any positions (long or short) in euro pairs going into the monetary policy announcement.
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