Since the implementation of U.S. reciprocal tariffs on April 2, FX option markets have undergone a notable repricing. The previous bias toward sustained USD weakness has given way to a more cautious stance, with positioning now reflecting heightened sensitivity to a potential dollar rebound and a broader uptick in volatility.
The immediate market response to the April 2 tariff announcement was a sharp USD sell-off, accompanied by aggressive hedging against further dollar weakness and heightened volatility. This drove implied vols and USD put premiums over calls to multi-year highs across several major pairs. However, much of that initial move has since unwound, with positioning now tilting decisively toward USD calls as the preferred vehicle for directional exposure. EUR/USD 1–3-month expiry risk reversals have fully retraced the April surge in USD put premiums, which had reached five-year highs. In GBP/USD, the bias has flipped dramatically—from multi-year highs in topside strike premiums in May to the strongest downside skew since early 2025. Meanwhile, USD/JPY risk reversals continue to reflect a long-standing downside bias, though the premium has narrowed to its lowest level since January.
Implied volatility remains near post-tariff lows, yet dealers appear reluctant to mark it down further—despite a notable premium over historical (realized) volatility, a traditional benchmark for fair value. Directional hedging over key event risks such as Tuesday's U.S. CPI attracts more hedges for USD calls than puts, reflecting heightened concern around potential dollar strength and associated volatility spikes.
Early buyers of USD/JPY volatility and USD call/JPY put options tied to Japan's upper house elections on Sunday have already been rewarded, as both spot and implied volatility have risen ahead of the event. Looking ahead, several potential volatility catalysts loom around the turn of the month—many of which may not yet be fully priced into the market, leaving room for a repricing of risk premiums. This suggests that traders could see increased opportunities for profit, stemming from the dynamic interplay between market expectations and actual economic developments. As the economic landscape evolves, market participants will need to stay vigilant, adjusting their strategies to capitalise on emerging trends and shifts in volatility.
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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!