It was a busy week on the geopolitical side as the G7 meeting didn’t have a very happy ending, while the world eyed the upcoming meeting between Donald Trump and Kim Jung-Un, which will take place on Tuesday morning in Singapore.
Market participants do not seem concerned about these two subjects. On Monday morning, the greenback eased slightly against most of its peers as the dollar index returned to 93.42, down 0.12%. After tumbling on the 1.1854 resistance on Friday, the single currency erased Friday’s losses partially and tested 1.1821. Safe haven currencies lost ground as buyers didn’t show up despite unstable geopolitical situation, which suggests that the investors are definitely not too worried about it.
Nevertheless, developments in the option market suggest that there is certain nervousness out there. Indeed, it is going to be a busy week for central banks as the ECB, the Fed and the BoJ are holding their rate decision meeting.
The 1-week implied volatility in EUR/USD jumped to 9.95%, from 7.57% last Wednesday. The downward move in the 1-week risk reversal measure – from to 0.21% to -0.16% - shows that investors are rather buying protection against a weaker currency pair. On the contrary, both the implied volatility and risk reversal measure in USD/JPY were little changed, suggesting that the market will focus its attention on the ECB and FOMC meeting. We expect that investors will pay less attention to the Trump/Kim Jong-Un meeting, and developments related to trade tariffs, and will focus on Powell and Draghi speeches.
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