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Foreign exchange (FX) traders should brace for heightened market volatility as the trading landscape evolves over the coming months. Historically, FX market activity tends to pick up after the summer lull, with the September-to-December period often marked by increased trading intensity. This surge is typically fueled by a combination of economic indicators, central bank decisions, and geopolitical developments that gain prominence as the year-end approaches.
That said, December often sees a slowdown in activity due to the holiday season, as many traders step back and market liquidity diminishes. In preparation for the busier months ahead, many traders have already scaled back their FX exposure, signaling a cautious stance in anticipation of a potentially volatile environment.
Adding to this dynamic, options volatility—or "option vols"—has declined, reflecting hesitancy among traders to engage in aggressive strategies or a lack of clarity regarding future price movements. This subdued activity underscores a sense of apprehension prevailing in the FX market.
One major catalyst for the anticipated volatility is the strong likelihood of the U.S. easing cycle resuming. Should the Federal Reserve opt to lower interest rates or adjust its monetary policy, it could trigger significant fluctuations in currency markets. This is further amplified by waning confidence in the U.S. dollar among traders, who appear to foresee considerable challenges for the currency. This erosion of sentiment sets the stage for intensified volatility in the months ahead.
Implied volatility for GBP/USD options has increased again this week due to the weakness of the USD. However, this rise follows a decline from the peaks seen in early September. Initial increases were noted as the GBP declined amid rising fiscal concerns in the UK. Although these concerns have subsided and the GBP has begun to recover, they are not completely resolved. Options expiring through 2026 remain susceptible to volatility and further GBP weakness. There has also been a consistent demand for options set to expire in the first and second quarters of 2026, particularly GBP puts. The UK budget scheduled for November 26 is expected to influence the longer-term trajectory of the GBP.
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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!