US Dollar Hedging Costs Rise Ahead of August Non-Farm Payrolls Report, Traders Prepare for Increased Forex Market Volatility

After a calm summer, hedging costs in the currency market are rising again, as traders are positioning themselves ahead of the upcoming US employment report on Friday, which could potentially trigger bigger price swings. On Thursday, the one-day implied volatility of the Euro against the Dollar rose to its highest level since June and is expected to close at its strongest level since April. This increase in volatility reflects the importance of non-farm payroll data, as traders need to assess this to determine the Federal Reserve's next move. In Fed Chairman Powell's speech last month, he mentioned that "downside risks to employment are increasing". Data released on Wednesday showed that job openings in the US dropped to a 10-month low in July, making Friday's non-farm payroll report more anticipated. If the employment data released on Friday shows weakness, it may fuel expectations of a larger rate cut by the Federal Reserve, thus weakening the dollar. Brown Brothers Harriman strategist Elias Haddad said, "August non-farm payroll report will determine if the market will begin pricing in expectations of a 50 basis point rate cut by the Federal Reserve on September 17, as the current market pricing is only for a 25 basis point rate cut." The Pound is also attracting hedging demand. Three-month relative hedging costs have risen to their highest level since January, as traders prepare for potential market volatility around UK Finance Minister Rishi Sunak's budget announcement on November 26. Deutsche Bank analyst George Saravelos stated that global concerns about fiscal policy are creating a "perfect storm", driving up yields and dragging down the pound. Non-farm payroll data is not the only driving factor. This week, an index measuring overall expected volatility of the Group of Ten (G10) currencies hit a one-month high. Risk factors are mounting, from UK fiscal concerns, political turmoil in France, to geopolitical tensions, a series of central bank meetings, and concerns about the independence of the Federal Reserve. On Thursday, the one-week volatility of the Euro rose to a two-month high, covering next week's European Central Bank meeting and US August CPI data. Although it is widely expected that the ECB will not adjust policies at next week's meeting, previous statements from policymakers have left the door open to a rate hike, making forward guidance crucial. The US August CPI data and Friday's non-farm payroll report will likely determine the tone of the Federal Reserve's policy meeting this month.