- EUR/USD trades near 1.1820 ahead of the ECB rate decision.
- Implied volatility metrics suggest traders don’t expect ECB to fuel big moves.
- Negative Eurozone inflation has fueled dovish ECB expectations.
According to a widely-tracked options market metric, Thursday’s European Central Bank rate decision is unlikely to yield big moves in EUR/USD.
Rangebound implied volatility
EUR/USD’s ATM volatility on one-month options, which measures the calculated or implied mid-rate volatility for an at-the-money (ATM) option, remains trapped in a multi-week range of 6.85-8.28. Further, the weekly volatility gauge is stuck in the range of 7.00 to 8.6.
Implied volatility represents markets’ expectations of how volatile an asset would be over a specific period. In other words, traders aren’t expecting EUR/USD to chart big moves on the ECB event.
The central bank is widely expected to keep policy tools unchanged. As such, the focus will be on the central bank’s take on the pace of the economic recovery, negative inflation, economic forecasts, and the deflationary impact of the euro’s 5% quarter-to-date rise against the US dollar.
Markets believe President Lagarde will jawbone the currency, given the Eurozone inflation has turned negative for the first time since 2016. As such, there is plenty of scope for disappointment and an uptick in EUR/USD. The pair is currently trading at 1.1820, having defended a four-month rising trendline on Wednesday.