Commerzbank’s Thu Lan Nguyen reports that implied EUR/USD volatility is low despite claims of the greatest threat to energy security in history. She notes that 3‑month implied volatility is lower than at the start of the 2020 and 2022 crises, and lower than shortly after Liberation Day last year. The article links expected FX volatility to monetary policy expectations. It says expected volatility tends to rise when markets anticipate large interest rate moves that would change the carry differential between currencies.

Why Implied Volatility Stayed Low

It adds that, after the outbreak of the Iran war, interest rate expectations shifted in both the US and the eurozone. The scale of the repricing is described as similar in both areas, at just over 50 basis points, so large changes in the rate differential are not currently implied. It also states that the ECB may respond earlier than in past inflation episodes, but suggests the market may be assuming too low a hurdle for rate hikes. As a result, it notes scope for a correction and larger EUR/USD moves. The piece says it was created with help from an AI tool and reviewed by an editor. Looking back at the analysis from 2025, we remember the period following the Iran war when EUR/USD volatility was seen as unusually low. The market expected the Federal Reserve and the European Central Bank to adjust rates by a similar magnitude, keeping the pair stable. This consensus, however, proved to be a significant miscalculation as we moved into the latter half of that year.

Implications For Traders Today

The view that the ECB would be less responsive than the market priced in was correct, leading to a notable correction. As the Fed proceeded with its adjustments while the ECB lagged, the interest rate differential widened significantly through the autumn of 2025. Consequently, those who were positioned for higher volatility saw profitable opportunities as the exchange rate experienced stronger swings. As of today, March 23, 2026, a similar pattern of complacency may be emerging in the options market. Recent data shows Eurozone core HICP inflation for February came in stubbornly high at 3.5%, well above the ECB’s target. In contrast, the latest US ISM Manufacturing PMI has dipped to 48.9, signaling a contraction and raising concerns about economic momentum. This divergence suggests the ECB may be forced to maintain a hawkish stance for longer, while the Fed could be pressured to consider easing policy sooner than expected. This creates a clear potential for a widening rate differential that would favor the euro. The market, however, has not fully priced in this potential for a significant policy split. For derivative traders, this environment signals that current implied volatility levels are likely too low. The risk of a sharp re-pricing in EUR/USD is growing, reminiscent of the conditions we saw back in 2025. Therefore, positioning for an increase in volatility seems to be the most logical response in the coming weeks. A practical strategy would be to purchase 3-month at-the-money EUR/USD straddles. This approach allows a trader to profit from a substantial move in either direction, capitalizing on the underpriced risk of a central bank policy divergence. It is a direct bet that the market’s current quiet state will not last. Create your live VT Markets account and start trading now.

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