FX Options Insights 29/07/24
Preparation for event-driven FX volatility - This week's significant events include central bank decisions from Japan, the U.S., and the UK, euro zone inflation on Wednesday, and monthly U.S. jobs on Friday. These events have the potential to cause an increase in FX volatility. Options with expiration dates after these events have shown a higher implied volatility risk premium. Overnight options will encompass the euro zone inflation and Bank of Japan decisions starting from Tuesday. The implied volatility for USD/JPY for a 1-week period is at 14.75 and for 1-month at 10.85, marking the highest levels since the April 29 BoJ intervention. There is a strong volatility premium for USD/JPY downside compared to upside strikes, with demand for 150.00 strikes remaining popular. The benchmark 1-month expiry EUR/USD implied volatility reached a new 3-year low at 4.75 on Friday, but rose to 5.0 on Monday as the spot tests below the key 200-dma support at 1.0821. The one-week implied volatility is meeting demand at 5.5, which is 1.0 above last week's pre-Fed inclusion low. The 1-week implied volatility for GBP/USD is approximately 7.0, and for 1-week EUR/GBP it is at 4.5 before the BoE decision on Wednesday. There are significant strikes in the lower/mid 0.84s expiring this week that should be taken into consideration. The implied volatility for AUD/USD with a 1-month expiry has decreased to 8.6 from a peak of 9.0 last week as the recent spot slide has halted. Traders will be cautious of the Australian CPI on Wednesday and its impact on the Aug 6 RBA policy decision (included within the 1-week expiry from Tuesday). It is important to be mindful of month-end flows and the larger G10 FX option strike expiries occurring this week.
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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!