What drives volatility and why it matters for investors

By: Bianca Botes, Foreign Exchange (FX) expert and Director at Citadel Global

Citadel Global Forex expert Bianca Botes demystifies the concept of market volatility - unpacking its root causes, how it plays out across key asset classes including equities, currencies, and commodities, and how to find opportunity amid fear – to help investors distinguish between noise and nuance as they grasp the structural drivers behind fluctuations in market pricing.

In the course of 2025, the financial markets saw sharp rises in volatility in response to events such as the imposition of high and unpredictable tariffs by the United States (US) on trading partners and escalating tensions in the Middle East. Measurement tools such as the VIX or the “fear index” have indicated that anxious and bearish investors expect greater price swings and market turmoil in the months ahead.

But what is volatility, how can it affect different asset classes and how can a better understanding of it open up opportunities for investors? Bianca Botes, Foreign Exchange (FX) expert and Director at Citadel Global, explains.

WHAT CAUSES VOLATILITY AND WHY IS IT A NATURAL PART OF FUNCTIONING MARKETS?

In simple terms, volatility measures how much prices move up or down because of uncertainty. Rapid and significant price swings indicate high volatility, while slow and modest movements suggest low volatility. Volatility is normal in financial markets and can be triggered by economic news, political events, corporate performance, unexpected global occurrences, or any events that cause negative market sentiment. Volatility impacts risk assessments, investment and trading opportunities, portfolio structure, investor behaviour and market sentiment.

HOW DOES VOLATILITY AFFECT DIFFERENT ASSET CLASSES AND INVESTOR BEHAVIOUR?

Volatility affects key asset classes such as equities, currencies and commodities in different ways, as each is influenced by distinct underlying drivers.

With equities (stocks), we typically see moderate to high volatility during earnings seasons, economic releases, or major news events, which can affect economic conditions and company performance as a result. Small-cap stocks and sectors like technology or biotech tend to be more volatile than large-cap or defensive stocks. Equity volatility often spikes during market crises or regime changes and can lead to increased correlations with other asset classes, reducing diversification benefits.

When it comes to FX and currency fluctuations, the market is normally affected by rate differentials, central bank policy, geopolitical events and global capital flows. What’s interesting to note is that major currency pairs, like the US Dollar (USD) and the Euro, are typically less volatile due to high liquidity, while emerging market currencies can be far more volatile. Highly volatile currencies are prone to sudden breakouts and erratic movements, especially during periods of high uncertainty.

Commodities like oil, natural gas, agricultural products and precious metals can experience dramatic price swings, especially during geopolitical crises, extreme weather events, or when supply and demand imbalances cause supply shocks and changes in global inventories. Lower liquidity compared to equities and currencies amplifies price movements in the commodity sector. Commodity prices are also affected by currency movements, especially concerning the USD, as most commodities are priced in USD.

HOW DO GEOPOLITICS, MONETARY POLICY AND MACROECONOMIC SIGNALS FUEL FLUCTUATIONS?

Geopolitical events such as conflict, global political instability, trade disputes and sanctions are powerful triggers of market volatility and sharp price swings. Their impact is felt through several key channels, including investor sentiment that can cause capital flight to perceived ‘safe haven assets’ such as gold and US Treasuries. Sectors such as defence, cybersecurity and commodities may benefit from increased geopolitical tensions, while automotive and technology exports can suffer due to disrupted supply chains and tariffs. Critically, geopolitical events often cause currency fluctuations as investors seek stability. The oil price also spikes or dips in response to global disruptions.

When we look at the effect of monetary policy on financial markets, price fluctuations are often triggered when central banks adjust interest rates or implement quantitative easing (QE). When central banks raise or lower interest rates, it alters borrowing costs and the relative attractiveness of stocks versus bonds. Unexpected changes can trigger sharp market reactions as investors quickly adjust their portfolios. Unanticipated policy shifts or ambiguous communication from central banks can lead to spikes in volatility, as seen during events like the 2013 ‘taper tantrum' when the US Federal Reserve (Fed) signalled an end to bond-buying programmes. Expansionary policies, such as QE, in turn, inject liquidity into markets and reduce volatility. In today’s interconnected markets, monetary policy changes in major economies like the US or European Union can ripple across the globe, amplifying volatility in both advanced and emerging markets.

ARE THERE PRACTICAL WAYS TO INTERPRET AND RESPOND TO VOLATILITY WITH CONFIDENCE?

Investors often panic sell, causing financial losses because of behavioural biases and fear triggered by short-term noise. To counter this, investors need to leverage volatility as an opportunity to turn short-term risk into long-term advantage. This is where it becomes important to prioritise risk management over fear, by diversifying investments across asset classes and geographies, and leaning on qualified professionals to manage portfolio risk through strategic long-term planning. It is also advisable for investors to have an emergency fund, to avoid realising losses when they need money urgently.