EUR/USD volatility trading before NFP

The US Dollar extended its rally against the Euro yesterday after stronger than expected ISM Manufacturing data. This data is an indicator of economic activity; the forecast had been for 48.5 while the actual number was 49.5.

To add to the bullish cause for the US Dollar the Euro area Consumer Price Index, a measure of inflationary pressure, was released Monday morning at -0.2%, which was lower than expected at 0.0% and lower still than last month’s data at 0.3%.

The reduced inflationary pressure in the Euro area and increase in economic activity in the US has helped the EURUSD fall from 1.10161 on Monday morning to current levels below 1.09000.

Interbank deposit rates for the Euro have reached negative levels as far out as the 1-year maturity. The European Central Bank (ECB), official interest rate for refinancing operations, is at 0.05%. However, there may be further loosening of official interest rates into negative territory. Even though the President of the ECB has suggested that interest rates hit the lower boundary when the deposit facility rate of the ECB was lowered to -0.30%.

The rest of the week ahead will see the release of some critical data from the US. Thursday at 15:00 GMT sees the release of ISM non-manufacturing PMI and Factory Orders. Both pieces of data are indicators of economic activity, and there is an increase expected in factory orders over last month's data which was -2.9%. Forecasts are for 53.2 and 2.0% respectively.

On Friday, we will see what may be the most important data of the month, Non-Farm Payrolls (NFP). Data is expected at 13:30 GMT, the forecast is an increase of 190k jobs, whereas last month’s NFP was 151K. There may be some surprises, as often happens with this data. Last month’s NFP number was forecast at 200k and released at a much lower level, sending the US Dollar lower sharply.

If you think there is going to be an increase in volatility for the EURUSD over the next week, then you mayBuy a Straddle. This consists of simultaneously buying a Call and a Put option with the same strike, expiry and for the same amount.

The screenshot below shows that a Buy Straddle strategy with strike 1.08576, 7-day expiry and for €10,000 would cost $127.49, 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 that the market will remain flat, and volatility will decrease then you maysell a Straddle. This consists of simultaneously selling a Call and a Put option with the same strike, expiry and for the same amount.

The screenshot below shows a Sell Straddle strategy with strike 1.08551, 7-day expiry and for €10,000 would generate $106.79 in revenue, for a total risk of $328.89.

This screenshot shows the profit and loss profile of the above Sell Straddle strategy.