By Harry Robertson
LONDON (Reuters) – Gauges of expected currency volatility jumped on Wednesday as investors braced for the U.S. presidential election, which could lead to major changes in economic policy and swings in the dollar.
One-week implied volatility in the euro-dollar currency pair rose to the highest level since March 2023, when the US faced a mini banking crisis, LSEG data showed. It would be the largest single-day increase since 2017.
The British dollar’s one-week implied volatility also hit its highest point since March. The metrics are derived from the prices of options, which investors use to hedge against – and bet on – movements in the underlying currency.
One-week options contracts now cover the day after the Nov. 5 election, in which Republican former President Donald Trump and Democratic Vice President Kamala Harris are neck and neck in the polls.
However, investors in recent weeks have taken their cues from the betting markets, which have shown higher odds of a Trump victory, which could lead to higher rates and budget deficits, both of which could potentially push up US yields and boost the dollar.
“The binary nature of next week’s match implies significant currency movements after the event,” Barclays strategists, led by Marek Raczko, said in a research note.
“The market expects most of the currency reaction to materialize in the week surrounding the elections. This can be justified by two things: first, the outcome may still be uncertain the day after the election, and second, the Fed (the US federal government’s Reserve) will meet the same week.”
The price rose to a three-month high of 104.63 on Tuesday, partly driven by recent strong US data and partly by rising investor expectations of a Trump victory.
Past US elections have provoked an even greater response in the run-up to the event. In the week before the 2016 election, which Trump won, one-week implied volatility in the euro reached almost 14%, while one-week implied volatility in sterling reached 13%.