(Bloomberg) --
Traders are far from convinced that this week's central bank meetings will be a game changer for the euro.
Options gauges show that expectations ahead of the Federal Reserve and the European Central Bank reviews are low, even though policy makers are under pressure to do more to support their economies through the coronavirus recession.
Investors are more concerned over the long-term however, as the uncertainty that surrounds the pandemic prevails.
The relative premium to hedge the euro over the next week reached its highest in almost two years on Thursday as investors adjusted their positioning before the policy decisions. Just two trading days later, traders are now paying a more muted price to protect themselves against abrupt currency moves, with the spread between implied and realized volatility in the euro-dollar near parity.
The Fed's April 28-29 meeting may not reveal any additional forward guidance, according to a Bloomberg survey of economists. Investors may need to rely on Chairman Jerome Powell's comments to decipher the bank's next moves. Most economists expect the ECB to keep monetary policy on hold this week, though see a chance that the Governing Council decides to boost the size of its Pandemic Emergency Purchase Programme.
There has been a steady fall this month in demand for options that pay out should the euro trade at wider ranges in the short-term than recently seen. The so-called butterfly shows that traders are preferring to focus on the medium to long term given the risk of a second wave of the coronavirus.
This is also reflected in the euro's term structure, which depicts the market's expectations for volatility in the common currency across time. The structure largely retains a normalized form, meaning that hedging costs are higher for the longer-term compared to shorter time-frames.
- NOTE: Vassilis Karamanis is an FX and rates strategist who writes for Bloomberg. The observations he makes are his own and are not intended as investment advice
©2020 Bloomberg L.P.
Essential Business Intelligence, Continuous LIVE TV, Sharp Market Insights, Practical Personal Finance Advice and Latest Stories — On NDTV Profit.
