FX options wrap – Price action favours USD and a volatile year end

A lack of significant data before a major U.S. holiday would typically weigh on FX option implied volatility, but elevated premiums reflect a nervous market facing some key event risks.

U.S. President Joe Biden announced the reappointment of Jerome Powell as Fed chair, removing some short term uncertainty and reinforcing the recent USD bid, but implied volatility retains longer term highs, especially 1-month expiries which fall after December’s U.S, UK, and Eurozone policy announcements.

USD/JPY options are pricing out Brainard Fed chair risk that helped to lift downside strike premiums on 1-month expiry risk reversals Friday-Monday. USD/JPY 1-month vol by recent and 1-year highs around 7.25.

GBP/USD 1-month sits just below recent 8.1 highs with a firm volatility premium for GBP puts over calls (downside strikes). EUR/USD 1-month vol at 7.0 is the highest in a year, and risk reversals sit just below last week’s new longer-term highs for EUR puts/USD calls (downside strikes). EUR/USD faces more barrier options at 1.1200 and every 50-pips to 1.1000.

Benchmark 1-month expiry option implied volatility

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Richard Pace is a Reuters market analyst. The views expressed are his own

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