LONDON, Oct 31 — A spate of unexpected policy pronouncements from the Federal Reserve and the European Central Bank is livening up the world’s most-traded currency pair.

With the Fed saying this week that it will consider raising interest rates in December, following ECB President Mario Draghi’s October 22 signal that his board may add stimulus, traders are ramping up bearish euro bets.

Hedge funds and other large speculators boosted net shorts on the shared currency by 43,368 contracts to 105,934 in the week ended October 27, the biggest jump in Bloomberg data going back to the euro’s 1999 debut.

The euro weakened 1.5 per cent in October, the most since May, to about US$1.10 (RM4.69). The tumble shattered a period of calm, lifting a measure of anticipated swings in the euro from the lowest in about eight months.

Three-month implied volatility in the euro-dollar rate rose to 10.75 per cent yesterday, from as low as 9.13 per cent this month. It’s still below the average for 2015.

“The ECB has signaled more easing, and we have the Fed signaling a rate hike this year can be in store,” said Morten Helt, a senior analyst at Danske Bank A/S in Copenhagen. “This has increased uncertainties a lot, and that’s what the market is pricing in.”

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Trading in the euro-dollar rate accounts for 24 per cent of currency deals, making it the most active transaction in the US$5.3-trillion-a-day market, according to the Bank for International Settlements.

If heightened fluctuations in the pair persist, it may present some foreign-exchange investors with opportunities to recoup losses. The Parker Global Strategies LLC index of currency managers’ returns fell in September and October, extending this year’s decline to 2.1 per cent.

Traders can expect more turbulence in the week ahead with the Nov. 6 release of October US payroll data.

The pace of job gains remains one of the biggest hurdles for the Fed as it seeks to raise borrowing costs for the first time since 2006. Investors had mostly priced out a 2015 increase before this week, when the Fed said that it would assess whether to raise interest rates at its December gathering.

Futures indicate that traders see about a 50 per cent chance that the Fed will raise interest rates from near zero in December.

The calculation assumes the effective fed funds rate averages 0.375 per cent after the first increase.

The employment report may determine whether the dollar’s rally is sustainable. Fed officials altered their take on labor conditions in their statement Wednesday, noting that the pace of job gains slowed since their last meeting. Employers added 180,000 jobs this month, up from 142,000 in September, according to the median estimate of economists in a Bloomberg survey.

“The payroll report will be key to the market’s continued confidence in Fed hikes this year,” Athanasios Vamvakidis, head of Group-of-10 currency strategy at Bank of America Merrill Lynch in London, wrote in a report.

“The likely renewed focus on monetary policy divergence should lend support to our bullish dollar view.” — Bloomberg