EUR/USD Volatility Divergence Signals Future Market Swings

Commerzbank's analysis suggests that the EUR/USD exchange rate may be due for a significant swing in volatility, driven by market expectations. According to Volkmar Baur from Commerzbank, the realized 3-month volatility of the EUR/USD has dropped to near five-year lows at 4.53%, which is lower than on only 2.2% of trading days over the past nearly 20 years.

This low level of realized volatility is not solely explained by central bank rate expectations, which are highly correlated and partly driven by oil prices. However, Baur notes that while oil prices do play a role, they cannot fully explain the current low volatility.

A key factor contributing to this divergence is the difference between historical and implied volatility, with implied volatility now standing more than one percentage point above historical volatility. This suggests that markets expect EUR/USD volatility to rise soon, despite the currently low levels of realized volatility.