EUR/USD Volatility, The Good News And Bad News

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To see what fundamentals may drive the next move in EUR/USD, check out the DailyFX Q1 Euro Forecast.

EUR/USD Volatility & Technical Highlights

  • Euro multi-month trading range historically low
  • Current trading environment may continue, but not forever

Euro multi-month trading range historically low

It’s been a frustrating past few months for directional traders, as every time the Euro starts to pick up momentum in either direction it’s stopped in its tracks and reverses. The bad news is that we may be on the cusp of yet another one of these reversal events along with more low volatility as EUR/USD sits on significant support. The good news is that at some point the pattern will be broken and the Euro will offer up a big directional move.

Not long ago I discussed Euro volatility and how not only volatility was low and set to climb, but that volatility of volatility was also low and ready to rise. This analysis implied that the latter (vol of vol) would change and that the level of volatility itself would rise with it.

That discussion was a month ago and vol of vol did indeed rise a bit, but actual volatility fell instead of rose. Disappointing but not altogether surprising. Macro situations can take longer to develop than initially expected, and of course longer than we would like to have our patience tested.

The 6-month historical range percentage of the Euro is at only about 5%, which puts it in rare territory. The last time there was this tight of a range was prior to the beginning of the 2014/15 melt-down. Prior to that it was late 2006 before the Euro rallied to record heights, and before that was a pair of instances in the 1990s (Euro price created synthetically from its current participants) where EUR/USD also embarked on large intermediate to big-picture price swings. A couple of those instances took some time before the really big volatility hit, but even an minor uptick in vol from here would be a welcomed event.

To see how other traders are positioned in the Euro and how this may forecast the next price move, check out the IG Client Sentiment page.

EUR/USD Monthly Chart w/Historical 6-mo Range

EUR/USD monthly chart w/historical range

All-in-all, while the short-term trading environment is difficult and could remain so for a while longer, better days for trend/momentum traders lies somewhere on the horizon. The prudent approach is to continue taking current trading conditions at face value and be careful not to chop yourself up, but don’t be lulled asleep as a higher volatile regime nears.

***Further discussion on this topic will continue in the trading/technical outlook webinars held on Tuesdays and Fridays. If you are looking for ideas and feedback on how to improve your overall approach to trading, join me on Thursday’s for the Becoming a Better Trader webinar series.

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---Written by Paul Robinson, Market Analyst

You can follow Paul on Twitter at @PaulRobinsonFX