FX Markets Volatility Ahead of the Fed Meeting

fundamental analysis FX volatility ahead of FED meeting

Financial markets are beginning to show signs of change. Volatility in FX markets in particular has increased (see first chart below) which is often the canary in the coal mine for other assets. Having witnessed a few false dawns already this year, we believe that the signals being generated this week are the real deal. The FOMC meets today and is likely to discuss the timing and trajectory of rate rises, which could appear more hawkish than many investors expect.
Volatility in FX markets, along with other assets, was in a very steady decline all year and reached historically low levels in the Summer. The chart below shows 3 month 'At the Money' volatility for G7 currencies. Having touched 5% in the Summer, there has been a large increase in the last two weeks up towards 8%. The current level is still low by historical standards and we expect volatility to move higher in the months ahead driven by diverging central bank actions, reduced US Dollar liquidity and the seemingly inexorable drive towards currency wars as politicians resort to the simplest, yet inevitably most harmful, action instead of implementing tougher structural reforms. 

fundamental analysis FX volatility ahead of FED meeting