FX Options Insights 13/03/25
FX option implied volatility has eased from the medium-term highs reached last week, as realized FX volatility declines and the momentum in both USD weakness and EUR strength stalls. The primary selling pressure has been concentrated on shorter-dated and front-end expiries, reflecting the current phase of FX consolidation. In contrast, longer-dated maturities have seen more modest declines, consistent with ongoing uncertainty surrounding the medium-term outlook.
The unwinding of many profitable EUR/USD positions has exerted downward pressure on implied volatility, with the benchmark 1-month expiry dropping from 9.2 to 7.85 before stabilizing amid renewed demand. One-month expiry 25-delta risk reversals are hovering near neutral, following a sharp reversal last week from 0.6 favoring EUR puts to long-term highs of 0.6 favoring EUR calls.
There is notable interest in short-term EUR/USD downside strikes, signaling hedging activity against the possibility of a deeper correction. The recent EUR rally was driven by expectations of a near-term ceasefire in Ukraine and an increase in Germany's debt limit—neither of which has yet been finalized.
USD/JPY implied volatility has similarly declined, accompanied by a reduction in downside-over-upside strike premiums. This reflects waning momentum among JPY bulls, with the pair consolidating above fresh October lows at 146.55. Additionally, risk premiums related to the Bank of Japan's March 19 policy decision have diminished, as market participants now anticipate no further rate hikes until at least May.
AUD/USD one-month implied volatility has fallen from 10.5 to 9.3 before finding support. Buyers have defended the 50-day moving average at 0.6272; however, failure to hold this level could trigger a retest of the recent low at 0.6187, potentially increasing demand for implied volatility.
GBP/USD one-month implied volatility has steadied in the low 7s after retreating from last week’s peak of 8.6.
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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!