FX Options Insights
U.S. President Donald Trump's decision to implement a 90-day tariff reprieve, excluding China, initially spurred a recovery in risk assets and a temporary reversal in the recent volatility risk premiums of FX options. However, this momentum quickly faded. The credibility of the U.S. has been undermined, and its sense of exceptionalism has been significantly eroded, adding to the uncertainty surrounding tariffs, future economic growth, inflation, and central bank policies. On Thursday, the USD experienced broad pressure, with EUR/USD aiming for last week's six-month high of 1.1147 and possibly higher. EUR/USD risk reversals have risen to their highest levels since 2020, favouring EUR calls over puts, and the one-year now shows a topside strike premium for the first time since 2021. This situation has increased implied volatility, with the one-month figure climbing to 9.0 after dropping from 10.7 to 8.3 following the reprieve (last week's high was 11.25). There has been renewed interest in buying the dip across the broader implied volatility spectrum, with the one-month USD/JPY rising above 13.0 after falling from Wednesday's high of 16.0, settling at 11.65 early Thursday in London. USD/JPY risk reversals highlight a strong volatility risk premium for downside strikes compared to upside ones, reflecting market concerns about potential USD weakness and increased risk aversion.
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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!