Both traded and realised volatility levels in EUR/USD are dipping back to pre-invasion levels in February 2022. Despite tight liquidity conditions, FX markets are taking their cue from the rates market. Here, measures like the MOVE index – a yield curve weighted index of 1-month US Treasury implied volatility –- have fallen to the lowest levels of the year, presumably on the view that the Federal Reserve will not be doing a lot with the policy rate over the coming months.

In other times, low volatility might have seen the dollar used as a funding currency for pro-cyclical trades. However, 5% overnight deposit rates make the dollar far too expensive to be a funding currency. This serves as a reminder that we need to see genuinely soft US data – particularly price data – and for the Fed to respond to it in order to see the dollar embark on a major cyclical bear trend. The steeply inverted US yield curve tells us that we are not at that point yet.

With US two-year yields holding onto around three-quarters of their rise since Friday's jobs report, it may be too early to expect EUR/USD to add to yesterday's gains. EUR/USD may trade well within a 1.0680-1.0780 range into tomorrow's Bank of Canada meeting. It may also take its cue from this week's China data, including May trade data released tomorrow and aggregate financing data later in the week.