After several years of depressed volatility levels in currency markets, the sector saw a break out of sorts in 2014 (see “Forex: what happened to the volatility?,” September 2014). With various central bank needles pointing in opposite directions, 2015 should offer plenty of opportunities for forex traders. With the U.S. Federal Reserve expecting to tighten, Europe rolling out their own quantitative easing plan and Japan continuing on a deflationary path, currency volatility is back with a vengeance.

John Kicklighter, senior currency strategist and head of Daily FX, says forex volatility is the earliest and easiest way to spot incoming market trends. “A lot of the volatility we see in broader financial system wavers, so we see it in [indexes like VIX], but it doesn’t catch and keep,” he says. “It has to do with a more nuanced, fundamental change in the financial system that doesn’t unnerve spectators the way it might in another market.” 

The pressure’s on

To come out of a period of stagnation, nations need to stimulate their economies and coax them to grow. The best option: quantitative easing, which the U.S. Federal Reserve introduced in 2009 and maintained through Q4 2014,  has been followed elsewhere. 

“It starts with the changing of monetary policy. There are big changes [globally] in monetary policy,” Kicklighter says. 

With a strong dollar following U.S. quantitative easing, though, the long-term forex picture looks a lot different for the United States than it does for the Eurozone. 

“I try not to overcomplicate it,” says Matt Weller, senior technical analyst at GAIN Capital. “Europe is printing more euros, and the Fed is decreasing the number of dollars in the financial system. That’s certainly going to provide a tailwind for the U.S. dollar and a headwind for the euro.” 

Almost all analysts are anticipating tightening for the United States soon, particularly because commodity prices are being hit hard by the strong dollar. What we don’t know is when, by how much and how many times. 

Kicklighter says we’ll see the hike sooner rather than later, almost regardless of the turn the markets take, because as a nation, we’re currently financially risk averse. “Move earlier, rather than later, especially when you have relatively stable markets,” he says. “The markets might want to meet reality until it gets down to the wire, until they actually hike, but the Fed will indeed hike this year and, unless we see a significant slowdown, it will probably happen in June or July.” 

“The potential exists to raise rates in June,” says Jason Rotman, president of Lido Isle Advisors. “But why commit? Every month, we look at the jobs report, see the response of the dollar (see “Is it time yet?” below), if the strong dollar is hurting retail sales, job creation. Then you could see a delay in raising interest rates. But it really depends on job growth, manufacturing, and other data.”