FX Options Insights 13/01/25
The rising FX option premiums underscore increasing market uncertainty driven by critical U.S. economic data and political events, particularly Donald Trump's inauguration. Here's a breakdown of key trends and insights from the current environment:
1. USD Rally and Volatility Premiums
A stronger USD rally, supported by upcoming U.S. data releases (PPI, CPI, retail sales), is driving FX volatility risk premiums higher. The term structure of EUR/USD and GBP/USD option premiums has hit 2-year highs across 1-12 months due to recent USD gains and barrier level breaks.
2. EUR/USD Dynamics
The pair faces successive option barriers after breaking the 1.0200 level, constraining the growth of implied volatility for USD calls. Front-end (1-month) risk reversals favour USD puts less drastically, peaking at 0.6, showing a moderated market outlook.
3. GBP/USD Risks
GBP/USD shows pronounced downside risks in risk reversals, reaching 2-year highs for downside strikes relative to upside strikes. This reflects market nervousness amid both U.S. and UK data (including CPI, GDP, etc.).
4. USD/CNH Volatility
Increased buying of topside USD/CNH options pressures downside strikes in short expiries, with 1-month implied volatility reaching a new peak of 6.3%, reflecting robust demand for USD calls.
5. AUD/USD and JPY Trends
AUD/USD: While implied volatility is elevated, it has not breached early-January highs.
USD/JPY and Cross/JPY: Renewed risk aversion is impacting these pairs, contributing to elevated implied volatility and higher JPY call premiums (risk reversals skews favour JPY upside).
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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!