The upcoming NFP and ECB events have set EUR/USD FX options for volatility. Implied volatility reflects the actual risk of volatility, which is a crucial component of option premiums. Currently, the implied volatility for EUR/USD FX options is lower as the spot price remains steady above 1.0500. The implied volatility for a one-month expiry has decreased to 7.8 from 8.15 on Wednesday and 8.8 on Monday. Nevertheless, the risk premium associated with near-term events supports very short-dated expiries. The overnight expiry now factors in the U.S. NFP, with implied volatility rising to 15.5 from 13.5 on Wednesday. The one-week expiry, which includes the ECB, has seen implied volatility return to Wednesday’s peak of 10.5 from 9.5.Following comments by Bank of England Governor Bailey, who projected four interest rate cuts in the UK by 2025, FX option implied volatility has resumed its decline. This has influenced spot trading and paused option sales. The GBP/USD has rebounded, moving within a familiar range as realised volatility diminishes. The benchmark 1-month expiry implied volatility has decreased to 7.2 from 7.6, reaching a three-week low. Today, traders sold 2-month implied volatility at 7.5, while the 3-month has decreased to 7.3, also hitting a three-week low. The 1-month risk reversal has shifted to 0.5 from 0.8, signalling a preference for GBP puts over calls at the November 22 spot low of 1.2475. Meanwhile, overnight expiry options have increased in value, indicating the volatility risk associated with Friday’s NFP report. The overnight GBP/USD rose by 2.0 to 13.5, reflecting a similar risk premium as observed for the NFP on November 1.Since the U.S. elections, there has been a significant accumulation of long cash positions in USD/CNH, making it potentially vulnerable to a major correction triggered by stop-loss orders. Option markets are factoring in this risk, adjusting hedge pricing to reflect the potential for a downturn. Options in the direction deemed most at risk have a premium price for risk reversals. For a 1-month expiry, there’s a notable downside premium, despite considerable gains in the spot market. The recent drop in spot rates from Tuesday’s new long-term high of 7.3145 has caused unease in the markets. Consequently, risk reversals for all expiry periods are showing an elevated premium on downside strikes.More By This Author:Daily Market Outlook – Thursday, Dec. 5FTSE Snaps Its Winning Five Day StreakDaily Market Outlook – Wednesday, Dec. 4
