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FX Options Insights
FX option implied volatility is currently engaging with historically low levels, but signs of recovery and stabilisation are beginning to surface as value hunters are actively participating in the market. Following the release of the U.S. Consumer Price Index (CPI) on Tuesday, volatility rates experienced a slight decline, although early trading on Wednesday witnessed some moderate purchasing interest in options set to expire within one to three months, which was bolstered by a weaker U.S. Dollar.
In particular, the one-month implied volatility for the EUR/USD currency pair experienced a rebound, rising to 7.5 after briefly dipping to 7.3 post-CPI release. Meanwhile, the USD/JPY pair also saw some recovery, lifting off its one-year low range of 8.5 to reach 8.9. Nonetheless, the potential for further demand may be constrained unless there is a more significant depreciation of the U.S. Dollar or an increase in realized volatility. Moreover, the one-month volatility for the AUD/USD pair has fallen to a one-year low at 8.1, while the GBP/USD pair has found some support at 7.0, remaining just above the lows recorded in late July and the long-term low of 6.8.
The risk reversal metrics indicate converging market sentiment: the EUR/USD pair is exhibiting a solid premium for USD puts over calls, which implies market expectations of both spot price increases and further volatility gains. In contrast, the one-month risk reversals for GBP/USD have flattened out, effectively canceling out recent premiums associated with downside strikes and showing a shift in preference towards purchasing USD puts in exchange for GBP calls. Additionally, a noteworthy event is the substantial presence of EUR/USD strike expirations valued at 8 billion euros positioned around the 1.1700 level, set to occur between Wednesday and Thursday. This specific strike level has already attracted some trading activity, but there appears to be a lack of other influences currently driving the foreign exchange market.
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Patrick has been involved in the financial markets for well over a decade as a self-educated professional trader and money manager. Flitting between the roles of market commentator, analyst and mentor, Patrick has improved the technical skills and psychological stance of literally hundreds of traders – coaching them to become savvy market operators!