The US government shutdown is over, but the FX markets haven’t reacted strongly yet. Key reports like October payrolls and CPI are still pending, keeping market activity calm. However, some signs suggest changes may be coming. The 1-month implied volatility for G10 currencies has been 1.1 vol above realized volatility since early April, indicating that traders expect upcoming data to shake things up. Additionally, there’s more interest in bullish Treasury options.

Softer US Economic Forecast

A weaker US economic forecast may lead to softer Federal Reserve policies, which could affect short-term rates and the value of the dollar. Currently, December rate cuts are only priced at 15 basis points, hinting at possible changes in the FX markets. The FXStreet Insights Team, consisting of journalists, gathers expert market opinions. The information provided is not investment advice, and readers should research thoroughly before making decisions. Now that the US government shutdown is over, the market is unusually calm. Delays in key reports, like the October payrolls and CPI, have left traders without crucial data. This has resulted in quiet currency movements. Yet, the options market suggests that a significant shift could happen soon. The implied volatility—reflecting market expectations for future price changes—has risen above the low realized volatility of the past month. This signals that traders are buying options to safeguard against, or profit from, an upcoming data-driven market shift.

Potential for Sharp Move

We believe this change will likely be driven by a weaker US dollar. Traders are increasingly purchasing bullish Treasury options, betting on falling interest rates, and expecting the delayed economic data to be disappointing. Recent indicators support this outlook, like the ISM Manufacturing PMI, which dropped to 48.9 in October, signaling a contraction in the sector even before the full effects of the shutdown were felt. Derivative traders should consider positioning themselves for increased volatility and a weaker dollar. Buying call options on pairs like EUR/USD or put options on USD/JPY could be good strategies, as they would benefit from both expected price movements and the rise in volatility. This scenario mirrors past events, such as the aftermath of the 2013 shutdown, when delayed data resulted in sharp market adjustments. The likelihood of a significant move is high because the market hasn’t fully priced in a dovish shift from the Federal Reserve. Fed funds futures currently show only a 60% chance of a 25 basis point rate cut in December. If the delayed data confirms an economic slowdown, we expect a quick adjustment that would likely weaken the dollar. Create your live VT Markets account and start trading now.

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