EUR/USD: Volatility has increased in August in 75% of the years since 2003 – SocGen

Ahead of the summer, G10 volatility has just hit its lowest level since early 2022. Fed tightening cycles kill Dollar volatility until data suggest that the economy will need rate cuts, economists at Société Générale report. 

Since 2003, August is clearly the worst month to hold a short vol position

EUR/USD volatility has just hit its lowest level since early 2022. But global monetary tightening comes at the cost of future growth, and investors could feel the pain when the data strike back. 

US inflation is decelerating quickly, while historically, Fed tightening cycles suppress Dollar volatility until data suggest that the economy will need rate cuts.

Last but not least, August is generally a month where being short vol is a painful trade. Since 2003, EUR/USD volatility has increased this month in 75% of the years. Even if history is not bound to repeat, investors should not neglect this seasonal effect, especially in an environment where volatility remains under selling pressure and with the imminent threat of thinner summer liquidity.