Watch Risks on these Key Currency Pairs Given Volatility Risk Ahead

• Euro tumbles following surprise Greek news, volatility almost guaranteed
• Forex volatility prices jump to their highest since “flash crash” of May, 2010
• Our strategy-trading bias unclear given extensive market uncertainty

The Euro looks almost certain to see significant volatility in the week ahead, and traders should keep an eye on these pairs given uncertainty surrounding Greece.

A surprise announcement from the Greek government on Friday sent the Euro significantly lower at Sunday’s open, and the resulting confusion makes further volatility exceedingly likely ahead of a planned referendum on Sunday, July 5.

FX options traders quickly sent Euro 1-week volatility prices to their highest levels in five years as markets opened on Sunday night, and indeed broader expectations point to potential turbulence in the week ahead.

Forex Volatility Prices Tumble after Big Week, but Greece Negotiations Represent Key Risk

Data source: Bloomberg, DailyFX Calculations

In many cases we would argue that the sharp jump in volatility prices might produce good market conditions for our volatility-friendly Breakout2 trading strategy. And yet the clear difficulty in this instance is that it is especially challenging to predict how markets will react to ongoing Greece-related headlines and the potential for a material market gap this coming weekend.

This isn’t to say there won’t be any trading opportunities ahead of the weekend’s referendum, but we would avoid outsized positions in the Euro—particularly against the safe-haven US Dollar, Japanese Yen, and Swiss Franc. Price action for the EUR/CHF is further complicated by the fact that the Swiss National Bank publicly announced it had intervened in order to protect against excessive CHF appreciation.

Expect more noise out of global central banks in what promises to be an eventful week for financial markets. Even beyond Greece, Thursday brings what is often the most-market-moving event in the US Nonfarm Payrolls report. It seems wise to keep risk tight ahead of a critical stretch for broader markets.