FX Options Insights 20/01/26
U.S. President Donald Trump's fresh round of tariff threats against European allies has reignited the so-called "Sell America" trade, reminiscent of the market movements following last April's Liberation Day tariff announcement. The fallout has been widespread, with U.S. stocks, Treasury bonds, and the dollar all taking a hit, while implied volatility has spiked significantly.
The EUR/USD pair is at the forefront of the FX market, as its 1-12 month implied volatility has reached unprecedented highs for 2026. Since Monday, the currency pair has rallied from below 1.1600 to the upper 1.17s. Short-term risk reversals have shifted to favor topside strikes, reaching 0.35 from a previously neutral stance. Key option barriers are positioned at 1.1500 and 1.2000, and any heightened risk of breaching 1.2000 is likely to fuel further demand for options.
Meanwhile, USD/CHF options have seen a surge in activity, driven by the Swiss franc's status as a safe-haven currency. This has pushed the 1-month implied volatility premium over EUR/USD to 1.4.
In the GBP/USD market, 1-month implied volatility has climbed to 6.5, surpassing its previous 2026 peak of 6.3 and rebounding from last week's low of 5.8. On the other hand, AUD/USD has reclaimed prior long-term highs in the mid-0.67 range, but option traders remain cautious, holding back on committing significant premiums due to past disappointments with topside breakouts.
Turning to USD/JPY, its 1-month implied volatility has nearly rebounded to its recent 2026 peak of 9.3 after dropping to lows of 8.3 last week. The market is pricing in risks in both directions as traders prepare for the upcoming Bank of Japan policy meeting and potential snap elections in Japan.
In summary, while FX option implied volatility hasn't yet reached the extreme levels seen during last April's tariff-induced turmoil, it remains elevated. For those looking to hedge against a similar scenario or other risk events, current levels still present opportunities to secure value.
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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!