FX Options Insights 08/01/25
On Tuesday, FX option implied volatility experienced a broad sell-off, retreating from long-term highs due to improved risk appetite and a weaker USD. However, on Wednesday, a panic-driven rebound occurred as the USD regained strength.
The decline in the EUR/USD spot price led to a rise in 1-month and 1-year implied volatility, pushing it up to 9.1 from 8.3 and 8.0 from 7.6 respectively, on Tuesday. Additionally, risk reversals saw a slight increase in the downside premium for EUR/USD compared to the upside.
In the case of GBP/USD, implied volatility surged to new 2-year highs as the spot price approached critical support and long-term lows at 1.2299 on Wednesday. The one-month expiry rose to 9.3 from 8.5 on Tuesday, with the downside premium over the upside in risk reversals also hitting new 2-year highs across the 1-12 month term structure.
For USD/JPY, the 1-month implied volatility increased to 10.8 on Wednesday, up from 10.2 on Tuesday. Meanwhile, AUD/USD's 1-month implied volatility saw a more modest rise, climbing to 10.55 from 10.2 on Tuesday (after peaking at 11.2 on January 1).
The market is now focused on the upcoming jobs data expected on Friday, which will likely influence whether the USD continues to strengthen or pauses. Overnight expiry options will reflect the anticipated realized volatility risk associated with Thursday's developments.
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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!