FX Options Insights 5/2/25
The FX markets experienced a drop in volatility after the U.S. announced a 30-day suspension on trade tariffs involving Canada and Mexico. Implied volatility for most currency pairs decreased from the highs observed on Monday, with the 1-month USD/CAD implied volatility falling sharply from 9.55 to 7.25.
EUR/USD option volatility and downside strike risk premiums have eased since Monday. The 1-month implied volatility dropped from 9.0 to 7.9, while the 3-month declined from 8.4 to 7.7, and the 1-year fell from 7.9 to 7.6. Risk reversals also adjusted lower, with the 1-month measure narrowing to 0.6 (EUR puts over calls) and the 3-month dropping from 1.3 to 0.9. Dealers are reportedly reducing short-term downside defensive trades. The significant 1.0400-50 strike expiry zone may help stabilize EUR/USD in the near term.
For USD/JPY, there was a notable increase in demand for JPY calls over puts, as risk reversals reached a two-month peak when the pair breached crucial support levels. This caused implied volatility to soar to its highest point since January 21.
In the case of GBP/USD, overnight implied volatility remained stable at 14.0 ahead of Thursday’s Bank of England policy meeting. The markets seem to be pricing in a 25bps rate reduction to 4.5% with an 8-1 vote from the MPC, indicating limited expectations for additional volatility related to the GBP.
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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!