FX options wrap - Weak USD volatility pressure tamed by euro risk
Below-forecast U.S. CPI data reignited U.S. rate cut bets and weakened the USD as it allows the Fed more room to lean dovish on Wednesday.
Overnight expiry implied volatility has been slow to ease from higher levels and highlights the potential for more FX volatility around the time of the Fed announcement at 1800 GMT.
Broader implied volatility has seen a mild retracement from the new recent highs posted in the wake of Sunday's snap French election announcement. EUR related vols were the biggest gainers with 1-month expiries at the fore.
Benchmark 1-month EUR/USD implied volatility had increased from 5.1 on Friday to 6.8 on Tuesday, but traded below 6.5 on Wednesday. There was similar activity in other EUR related 1-month vols, with EUR/GBP up from 3.75 to 5.65 before easing slightly.
There has been a significant increase in EUR put demand via vanilla and exotic type options this week as the market covers the risk of more EUR losses. European political risk will remain a source of uncertainty and support for EUR options and help to limit deeper premium declines.
Overnight options will highlight the perceived volatility risk to JPY related currency pairs from Thursday, when expiry includes Friday's BoJ policy announcement. One-week expiry options will reflect any additional FX risk from Swiss and UK policy decisions from Thursday.
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1-month expiry FXO implied volatility https://tmsnrt.rs/3KGplvJ
Overnight expiry FXO implied volatility https://tmsnrt.rs/4ehbmKl
(Richard Pace is a Reuters market analyst. The views expressed are his own)
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