FX Options Insights 09/01/25
An increase in implied volatility, after a short dip earlier this week, highlights growing market anxieties amid various foreign exchange risks. Central to these worries is the expected Trump presidency and concerns regarding his inflationary policies, which have heightened demand for the USD and raised option-implied volatility since the U.S. election. Furthermore, escalating fears about economic growth outside the U.S. are putting additional pressure on the GBP as uncertainty mounts around the UK government's budgetary plans.
The rise in GBP-related implied volatility has sparked a widespread recovery from Tuesday's lows, emphasising GBP's susceptibility. The benchmark 1-month expiry GBP/USD implied volatility has jumped from 8.5 to new 2-year highs of 11.0 in just one day. One-month expiry 25 delta risk reversals have seen their volatility premium for GBP puts compared to GBP calls triple, alongside a notable demand for strikes in the 1.20 to 1.15 range to protect against further GBP/USD declines. On the other hand, EUR/USD has regained its recent highs, reaching 2-year peaks across its 1-12 month expiry term structure. However, a large number of long downside strike barrier options appear to be keeping front-end EUR put risk reversal premiums stable, with billions of euros in soon-to-expire 1.0300 strikes helping to maintain FX stability for the time being.
Increased short-term FX volatility risk premiums are evident as Friday's U.S. jobs data approaches, raising the chances of realised FX volatility—with GBP being especially impacted. Overnight expiry implied volatility for GBP/USD has surged to 20.0, which also accounts for a speech from the deputy Bank of England Governor scheduled for late Thursday.
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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!