Why calm currencies pose problems for FX investors

Leading currencies have been so consistent for the preceding six months that traders have wondered whether their pricing screens are broken. Sterling has captured attention with its failure to break out of narrow ranges while investors try to model out the design, timing and possible impact of Brexit. Yet the lethargic spell is more widespread. Observed fluctuations in the euro’s market rate against the greenback, for example, are now reaching the historic lows of 2014, with the currency stuck around $1.13.

This presents a dilemma for investors, hedge funds and banks, revenues from fixed income, currency and commodities business dropping around 11 percent in the first quarter compared with last year amid low volatility. Anyone hoping for a direct surge of movement may be disenchanted; measures of expected market rate fluctuations also remain at five-year lows, which means markets are poised for further inaction with some FX markets in stasis.

One reason is the pattern of interest rates in the Eurozone and the US. The Federal Reserve has maintained its guidance it will not raise rates in 2019 and the European Central Bank has followed suit, demonstrating that it does not expect to tighten monetary conditions this year. This monetary constraint on markets is so rigid that wobbles in Italian bonds or the weak performance of European bank stocks are not exercising their normal pressure on the exchange rate. Such as the euro not breaking below its $1.12 to $1.16 range. Traders may be strongly recommended to go into hibernation until the second half of the year.