FX Options Insights 11/02/25
This week presents a critical juncture as U.S. Fed Chair Jerome Powell prepares to present his semi-annual testimony to the Senate Banking Committee on Tuesday. This will be succeeded by the release of important U.S. CPI data on Wednesday. Nonetheless, these occurrences have not markedly impacted FX volatility premiums as they have previously. FX volatility is a significant and unpredictable factor in FX option premiums, leading dealers to rely on implied volatility as a substitute. Variations between implied volatility and actual or realised volatility throughout the lifespan of an option present a potential trading opportunity. When overnight expiry options include a significant event such as Powell's speech and the inflation report, any changes in implied volatility act as a signal for the extra realised volatility that dealers expect due to the event. Despite the incorporation of Powell's speeches and the U.S. CPI data, overnight expiry implied volatility has remained largely unchanged.
On Tuesday, the overnight expiry for EUR/USD implied volatility initiated at around 15.0, indicating a premium/break-even of 64 USD pips in both directions. In comparison, it increased from 12.5 to 17.5 ahead of the January 15 U.S. CPI release, reflecting a shift in premium/break-even from 53 USD pips to 75 USD pips.
For the USD/JPY pair, overnight implied volatility held steady at approximately 16.75, translating to 106 JPY pips in either direction, following an increase from 14.5 to 17.0 prior to January's CPI data release (a change from 92 to 108 JPY pips).
The overnight implied volatility for AUD/USD increased to 11.0, up from 10.5 on Monday. This change corresponds to a movement from 28 to 29 USD pips, in contrast to an earlier increase from 10.0 to 13.0, which represented a shift from 26 to 33 USD pips prior to the January 15 data.
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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!