Commerzbank’s Thu Lan Nguyen highlights that implied volatility for EUR/USD remains unusually low, despite what she describes as the greatest threat to energy security in history [1]. The 3-month implied volatility for EUR/USD is currently trading significantly lower than levels seen during the crises in 2020 and 2022, or even shortly after Liberation Day last year [1]. Nguyen attributes this subdued volatility to monetary policy expectations, noting that both US and Eurozone interest rate expectations have shifted significantly following the outbreak of the Iran war, with changes in both regions amounting to just over 50 basis points [1].
Because the magnitude of interest rate changes is similar in both the US and Eurozone, Nguyen argues that a significant change in the interest rate differential—and thus a major exchange rate move—is not expected at this time [1]. She further suggests that the options market may be underpricing EUR/USD risk, given the current low implied volatilities [1]. Nguyen is less optimistic than the market regarding the European Central Bank’s responsiveness, stating that the hurdle for interest rate hikes is likely higher than the market assumes [1].
Nguyen sees potential for a correction and stronger EUR/USD swings if the ECB does not act as quickly as markets expect, indicating that volatility could rise if monetary policy surprises occur [1]. No specific market reactions or analyst opinions beyond Nguyen’s assessment are provided in the article [1].
CONCLUSION
Commerzbank’s analysis suggests that the options market may be underestimating EUR/USD volatility amid heightened energy security risks. If monetary policy diverges from current expectations, particularly in the Eurozone, stronger exchange rate movements and increased volatility could follow.