FX options have been ahead of the curve in predicting the USD's recent rally, but they are not yet signaling a full-scale resurgence. The EUR/USD's dip below 1.1600 has contributed to a rise in implied volatility, with 1-month risk reversals shifting back towards downside protection. Additionally, the 3-month tenor has lost its topside strike premium, reinforcing the bearish sentiment. Despite these moves, gains in implied volatility remain modest, with overall levels still hovering near 6-month lows. There appears to be little urgency to hedge below 1.1500 for now, as strong euro demand persists on dips. Significant expiries clustered around 1.1600 could help stabilize spot prices through Friday.
In GBP/USD, the recent increase in downside strike premiums for risk reversals has started to lose momentum, as spot losses slow around 1.3400, coinciding with a major strike expiry set for Friday. USD/JPY has been a focal point of recent FX volatility, driven by robust demand for topside protection and event hedging ahead of Japan's upper house election on Sunday. The 1-week 25-delta risk reversal now shows a rare topside strike premium, last seen in 2022, while the benchmark 1-month expiry is nearing its lowest downside skew in the same timeframe, reflecting a notable shift in sentiment and positioning. However, with the pair already rallying sharply and implied volatility elevated due to expectations of an opposition victory, the larger market reaction may occur if the ruling party defies forecasts and retains power. Key option barriers at 150.00 remain a potential ceiling for the pair.
Across the G10 currencies, implied volatility continues to stay subdued compared to the April 2 "liberation day" highs, as realized volatility remains low amid the summer trading lull. For now, the appetite to position for a broader USD breakout appears limited, although the options market may be quietly setting the stage.
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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!