If we could pinpoint a reason why volatility has been so low, we would turn to the bevy of event risk in the first week of June as a possible reason. Ever since the May 8 European Central Bank meeting, speculation over what the ECB might do has kept a lid on much of anything in markets – a steady erosion of the Euro, a steady float higher in global equities, and a steady downdrift in sovereign yields has played out, calmly.
So while the low volatility environment may be sapping alpha generating opportunities in the short-term, the approaching event horizon at least offers a time for traders to mark-to-market their expectations for the next wave of central bank stimulus.
The necessity for the ECB to act significantly and swiftly on Thursday can’t be understated, especially in context of today’s disappointing Euro-Zone inflation data. For your consideration, despite a worse than expected headline print (+0.5% vs +0.6% exp, from +0.7% (y/y)), the Euro has pivoted off of its daily lows; market participants haven’t taken the data as a ‘sure sign’ that the ECB will unveil something substantive, at least beyond what’s being priced in thus far.
Over the coming days, the volatility swoon is likely to remain and truthfully, any concerted shifts in positioning could prove inconsequential fairly quickly once the last two days of the week arrive. Nevertheless, we continue to monitor the potential counter-trend bullish falling wedge developing in EURUSD.
Overall, we are watching how EURUSD and USDCHF react to incoming market conditions: EURUSD has broken the uptrend from July 2013; and USDCHF might be working on a double bottom now that it has broken the downtrend from January 2014. See the video above for a more detailed technical outlook.