It would be unwise to blame FX option market indications when underlying news fails to bring in significant change in underlying asset, so does it happen in FX OTC market during central bank's monetary policy seasons.
As you can observe the ATM implied volatilities ahead of central bank's actions in Europe and in US. During last week's ECB's monetary policy meeting, the EUR vols were acting crazily that seemed like blowing out of the proportion but same is not happening with USD on the eve of Federal Reserve's policy today.
What could be the reason for this..? the answer lies in the sentiments in FX options markets for euro had priced in with an anticipation of ECB's change in its policy actions but here in case of Fed no changes were expected.
What we continue to interpret the underlying fact of OTC markets for dollar is that the Federal Reserve may be disappointed for various reasons:
By yesterday’s softer consumer spending report, the release should not alter their plans to raise interest rates in 2016.
Retail sales in February declined but the downward revision in January was even weaker, which means U.S. Q1 GDP growth could be less than 1%.
Especially with the trade balance widening in January. The year is off to a soft start but the improvement in the labour market, easing of financial conditions and rise in commodity prices signals a brighter outlook that should keep the Fed on track to normalize monetary policy.
Their greatest fear is that by raising rates too slowly, they will e eventually find themselves behind the curve on inflation leading to the risk of asset bubbles.
As a result , the central bank seems unlikely to change the interest rates, the greenback strengthened against sterling and the commodity currencies, traded lower versus the JPY and held steady against the euro and Swiss franc.
The material has been provided by InstaForex Company – www.instaforex.com