The EUR/USD has been having a bumpy ride during the past 3 weeks as price has zig zagged between 1.1200 and 1.1370. Volatility has been on the decline as a consequence of this sideways price action, however, that may be about to change as we have a couple of events this week that could reignite the markets.
This evening at 18:00GMT, there will be a scheduled Federal Open Market Committee (FOMC), where the board of directors of the Federal Reserve will make a decision on monetary policy. There have been calls from senior executives from local Federal Reserve banks stating that an interest rate hike could happen as soon as April. It would seem, at this point, that the markets may not be completely backing this theory. In fact, at one point there had been forecasts of 4 interest rate hikes for 2016, recently that call was reduced to only 2, with some analysts’ comments betting on only 1.
Of course things can change a lot and economic data from the US will be the main factor to determine a shift in monetary policy. In the meantime, what may cause an increase in volatility is the wording of the statement released after the FOMC is held. The markets will be watching closely for any further hints as to how quickly the Federal Reserve may proceed with hiking interest rates.
From Europe we can expect important economic data for the Euro area to be released on the last Friday of every month. This is an improvement on the usual procedure, and brings Europe in line with the UK and the US. Starting this Friday at 10 am, we will have data releases of the Euro area for Unemployment, Inflation and GDP. So we could see another bout of volatility if numbers diverge from expectations.
If you think volatility will increase over the next week then you may buy a Straddle strategy which consists of simultaneously buying a Call and a Put option with the same strike, expiry and amounts.
The screenshot below shows a EURUSD Buy Straddle with a 1.12885 strike, 7 day expiry and for €10,000 would cost $116.32, which would also be the maximum risk.
This screenshot shows the profit and loss profile of the above Buy Straddle strategy, just click the Scenarios button.
On the other hand, if you feel volatility we remain flat or fall over the next week then you may sell a Straddle strategy which consists of simultaneously selling a Call and a Put option with the same strike, expiry and amount.
The screenshot below shows a Sell Straddle strategy with a 1.12887 strike, 7 day expiry and for €10,000 would generate a revenue of $95.60, with a total risk of $321.38.
This screenshot shows the profit and loss profile of the above Sell Straddle strategy.
The content provided is made available to you by ORE Tech Ltd for educational purposes only, and does not constitute any recommendation and/or proposal regarding the performance and/or avoidance of any transaction (whether financial or not), and does not provide or intend to provide any basis of assumption and/or reliance to any such transaction.
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