As several central banks are set to make interest rate decisions in the coming weeks, options traders are betting that market volatility will see a final rise before falling low for the summer.

Risk reversal shows that in the weeks leading up to the policy decisions of the European Central Bank and the Federal Reserve on June 6th and June 12th, the most bearish option traders have been on the euro in the past four weeks. Implied volatility in two weeks rose to the highest level in nearly a month, and option prices are currently the highest since early April.

The market expects the European Central Bank to cut interest rates this week, but sustained high inflation data make the prospects for further rate cuts more uncertain. The market also expects the Federal Reserve to keep interest rates unchanged, and traders will look for clues on rate cuts from Fed Chairman Powell's speech.

"This is a different easing cycle," said Tanvir Sandhu, chief global derivatives strategist at a foreign media company. "The European Central Bank has already decided to cut interest rates in June, but will be highly dependent on data thereafter. The tail end of the Fed's policy path has been compressed. If the market is range-bound between key data releases, volatility is likely to come down."

US stock options traders have already priced in higher implied volatility from June 7th's employment report to a series of events ending on June 12th. By then, people will see the long-awaited CPI inflation data and the Fed's interest rate decision, the latter of which may have a smaller impact because the market generally expects the Fed to maintain lending costs. The auction of 30-year US Treasury bonds by the US Treasury Department afterward may also affect the market. The market also expects a slight fluctuation in the Euro Stoxx 50 index around June 6th.

Chris Murphy, co-head of derivatives strategy at Susquehanna International Group, said option traders tracking the iShares Russell 2000 ETF show particularly high expectations of volatility, partly because small-cap stocks have been shown to be very sensitive to changes in bond yields.

In the options market, some investors have begun buying July US bond options targeting a drop in the 10-year Treasury yield to around 4.32%, while cheap June SOFR put options seem popular as a hedge against hawkish comments from the Fed on June 12th.

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