FX Daily: Surprisingly low volatility keeps carry trade dominant in Daily Currencies Ratings 13/05/2026 USD: Fed pricing shifts more hawkishly One dominant observation in FX markets right now is that traded volatility is surprisingly low. Despite the prospects of a stagflationary oil shock derailing the global economy, FX volatility levels are not far from their five-year lows. That probably has a lot to do with equity markets, where the AI super-cycle continues to dominate, and we are noting how equity markets are playing a more dominant role in FX pricing than either rate differentials or oil prices. With summer fast approaching, it seems like it will take a lot to shake the market out of its low volatility mindset and will keep the G10 high yielders of the Australian dollar and Norwegian krone in demand as carry trade strategies remain popular. These currencies also benefit from commodity exposure and have seen their terms of trade rise since the Iranian conflict began. Barring a sharp fall in equity markets, modest moves in currencies will continue to be driven by the next big move in oil prices and how central banks (including the Fed) react to higher inflation. On the former, Brent oil is steady near $106/bl. Look out today for monthly oil market reports from the IEA and OPEC. Later today, we will also see the weekly EIA oil inventory data, where any larger drawdown than the 2 million barrels expected could drive oil prices higher again. For the Fed, we note that yesterday’s above-consensus April CPI numbers have pushed 1-month OIS rates priced one year forward to the highest levels since early 2025. Most are concluding that Kevin Warsh, who should be confirmed as the new Fed Chair today, will have little room to get his dovish message across in the current environment. Today’s input to the Fed story will be the April PPI numbers and a speech by the Boston Fed’s Susan Collins, seen as being towards the more hawkish end of the spectrum. With reasonably high deposit rates of 3.65% (one week) and seen as a hedge if oil prices spike or equities turn south, the dollar should stay reasonably in demand for the time being. Given that the DXY dollar index is weighted heavily to European currencies and the yen, DXY can continue to trade in a 98.00-99.00 range. Against emerging currencies, the dollar could come a little weaker in anticipation of some warm words and commercial deals resulting from President Trump’s forthcoming trip to China. Chris Turner EUR: Low vol environment EUR/USD three-month traded volatility is now 5.7%. That is more than 1% below realised volatility and not far from the 5.2/5.3% lower end of the range for traded volatility seen over the last five years. That does not mean that a new trend cannot occur, but when looking at the relatively flat risk reversal (the price of a euro call over an equivalent euro put), the conclusion is more range-bound EUR/USD trading. Given that we see slightly greater upside risks to oil prices from current levels, EUR/USD could come a little lower over the coming sessions. However, good demand should be found once again at 1.1650. On the calendar today is the second release of 1Q26 eurozone GDP – expected at 0.1% QoQ – and a few ECB speakers. The big speeches from Christine Lagarde and Philip Lane do not come until this evening, however. Expect them to hold out the prospect of an ECB rate hike in June, otherwise the euro will get hit. Chris Turner GBP: Starmer clings on Sterling finally s