The narrow EUR/USD ranges of the last two years have been the exception rather than the rule. And it is tempting to say that the advent of Trump 2.0 – or Trump unleashed, as many commentators are calling it – can usher in a period of higher volatility. Certainly the EUR/USD FX options market is taking note and has pushed one year EUR/USD traded volatility up to the highest levels since October.
What holds us back from concluding that yes, we expect structurally higher levels of FX volatility in 2025, is that the peak Trump trade wars of 2018-2019 saw EUR/USD traded volatility actually decline. Here, it seems investors got used to Trump protectionism back in 2018/19. The difference in 2025, however, is that we could be talking a global trade war and not just protectionism against China, which was the case in 2018-19.
We also note in the chart above that EUR/USD is breaking to the downside from a historically low volatility environment – a warning of a volatility regime change.
Given the heavy macro/geopolitical factors favouring the downside and the fact that EUR/USD is not particularly undervalued based on our medium term models, we certainly do not want to stand in the way of a EUR/USD move to parity nor fight the rise in higher traded volatility levels. - ING
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