While Greece’s potential exclusion from the EMU will remain an important distraction, FX markets’ should slowly return their focus to the gravitational pull of US rates in coming days. Indeed, while the combination of Greek headlines, softer US data and a still cautious FOMC has recently lessened the impact of rising US funding costs, it is unlikely to be long before they return. Stronger US labour data could prove the necessary trigger, with the underlying trend in US unemployment claims continuing to improve steadily.
Have the FX markets recently forgotten US interest rates are still set for crisis? Perhaps. Indeed, our latest FX Vol Radar – Fed still suppressing FX Vols – reflects such a loss of memory, with volatility being sold and correlations once again clustering around their familiar risk-on/risk-off theme.
Given that we continue to expect the Fed’s first tightening to be delivered in October, such option market movements do not appear justified, arguing that EUR/USD pressure should slowly return.
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