Euro Pressured as Volatility Rises on Jackson Hole, FOMC Meeting

  • Dollar stabilizes as traders stay pat amid White House turmoil
  • Yen outperforms; sterling little changed before Brexit papers

Sheets Says Central Banks Short on Inflation Objective

The euro started the week on a defensive footing amid thin flows as the market’s focus remained fixed on the central bankers’ summit at Jackson Hole, Wyoming later this week, which has kept intact demand for long-volatility trades.

Even as odds have diminished that the Federal Reserve’s annual symposium could be a game changer for markets, the euro’s one-week implied volatility rose the most since July 13 as long-vega trades gained traction. U.S.-South Korea joint military drills starting Monday, which raises the risk of a rebound of North Korea-related tensions, also supported the case for such positioning. The relative premium to own exposure in euro-dollar options over Jackson Hole rose to a three-week high.

One-month volatility in dollar crosses also jumped as the tenor captured the aftermath of the Fed’s Sept. 20 meeting. The Bloomberg Dollar Spot Index was slightly higher as of 10:18 a.m. London with flows closer to the lower part of this month’s range, according to Europe-based traders. The euro was sold by intraday accounts, they added, as interbank and leveraged names were seen willing to fade moves 0.5 percent away from current spot price.

  • The common currency was 0.1% lower at $1.1744; it rebounded from a $1.1731 day low while 21-DMA at $1.1762 capped moves higher during Asia hours
    • Amid a thin data calendar, muted flows could see option expiries worth of EU720m at 1.1700 coming into play
  • U.S. political tensions continue to weigh on investor interest to add large fresh positions even as Steve Bannon’s exit from the White House did little to rattle currency markets, said the traders, who asked not to be identified as they weren’t authorized to speak publicly
  • The dollar was higher versus most G-10 peers as the yen outperformed
    • USD/JPY dropped 0.3% to 108.90 low, weakening for the fourth day; the Japanese currency found demand from macro names also versus the euro and the Swiss franc: traders
  • The British pound stood little changed at 1.2875 as the U.K. government was expected to set out its position related to Brexit negotiations
    • Details on how it will treat confidential EU information obtained before Brexit and on goods placed on supply chains in the EU single market are due
    • Resistance by 55-DMA at 1.2930 may absorb additional dollar selling pressure
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